UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended January 31, 2010
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 0-22823
QAD Inc.
(Exact name of Registrant as specified in its charter)
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Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
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77-0105228
(I.R.S. Employer Identification No.) |
100 Innovation Place
Santa Barbara, California 93108
(Address of principal executive offices and zip code)
Registrants telephone number, including area code (805) 566-6000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. o YES þ NO
Indicate by check mark if the Registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. o YES þ NO
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ YES o NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of Registrants knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or an amendment to this Form 10-K. þ
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. (See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act). (Check one):
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o Large accelerated filer
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o Accelerated filer
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þ Non-accelerated filer
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o Smaller reporting company |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). o YES þ NO
As of July 31, 2009, the last business day of the Registrants most recently completed second
fiscal quarter, there were 31,065,480 shares of the Registrants common stock outstanding, and the
aggregate market value of such shares held by non-affiliates of the Registrant (based on the
closing sale price of such shares on the NASDAQ Global Market on July 31, 2009) was approximately
$46.4 million. Shares of the Registrants common stock held by each executive officer and director
and by each entity that owns 5% or more of the Registrants outstanding common stock have been
excluded in that such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
As of March 31, 2010, there were 31,365,150 shares of the Registrants common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10 through 14 of Part III incorporate information by reference from the Definitive Proxy
Statement for the Registrants Annual Meeting of Stockholders to be held on June 9, 2010.
QAD INC.
FISCAL YEAR 2010 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report on Form 10-K contains
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Any statements contained herein that are not
statements of historical fact should be construed as forward looking statements, including
statements that are preceded or accompanied by such words as may, believe, could,
anticipate, would, might, plan, expect and words of similar meaning or the negative of
these terms or other comparable terminology. Forward-looking statements are based on current
expectations and assumptions that are subject to risks and uncertainties that could cause actual
results to differ materially. Factors that might cause such a difference include, but are not
limited to, those discussed in Item 1A entitled Risk Factors. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect managements opinions only as of
the date of this Annual Report on Form 10-K. We undertake no obligation to revise or update or
publicly release the results of any revision or update to these forward-looking statements. Readers
should carefully review the risk factors and other information described in this Annual Report on
Form 10-K and the other documents we file from time to time with the Securities and Exchange
Commission, including the Quarterly Reports on Form 10-Q to be filed by QAD in fiscal year 2011.
PART I
ABOUT QAD
QAD Inc. (QAD, the Company, we or us), is a global provider of enterprise software
applications, and related services and support. QAD is principally focused on addressing the needs
of global manufacturing companies. Our solutions are configured to address the requirements of the
following specific manufacturing industries: automotive, consumer products, food and beverage, high
technology, industrial products and life sciences. QAD software is used by over 2,500 manufacturing
companies around the world and QAD employs approximately 1,350 people globally.
QADs main Enterprise Resource Planning (ERP) product suite is called QAD Enterprise
Applications, formerly marketed as MFG/PRO. The QAD Enterprise Applications suite provides a robust
set of capabilities designed to support the core business of our global customers and enable most
common business processes.
In developing the QAD Enterprise Applications suite we have incorporated functionality
required for the specific industries in which our customers operate. We aim to build solutions
which are easy for customers to implement, are simple for users to learn and require minimal
ongoing support.
Industries we serve:
Automotive: QAD has considerable experience addressing the needs of global automotive parts
manufacturers. We have developed specific solutions to address the collaboration
requirements of Tier 1 suppliers (the companies who deal directly with Original Equipment
Manufacturers), as well as suppliers at lower tiers of the supply chain. QAD has delivered
innovative solutions to support industry initiatives such as In Line Vehicle Scheduling
(ILVS), and played a part in formation of de-facto standards for the industry such as the
Material Management Operations Guideline/Logistics Evaluation (MMOG/LE). QAD participates in
key industry associations and supports customers in all main automotive markets with
specific capabilities addressing the local requirements in North America, Japan, China and
Eastern Europe, among others. Many of the parts for passenger cars on the road today have
been made by QAD customers.
Consumer Products: QAD delivers solutions for consumer products companies throughout the
world. Our customers range from companies making fast moving consumer goods such as
toiletries and consumer electronics, to consumer durables such as appliances. QAD delivers
solutions that address the business needs of supplying major retailers, including
promotional pricing, cold chain and quality compliance, as well as providing traceability
and logistics control throughout the process. Our solutions address demand management and
replenishment. QAD customers include leaders in the personal media player market and common
brand names in domestic appliances.
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Food and Beverage: QAD delivers solutions which address the needs of many sectors of the
food & beverage industry. Our solutions support the operations of food and beverage
customers such as major brewers and wine makers, including local legislative requirements
for alcoholic beverage producers. QAD solutions address customers in the daily fresh and
fast-baking industries who plan and deliver their production within hours, instead of days.
QAD solutions support all regulatory and quality initiatives throughout cold chain and
Hazard Analysis and Critical Control Point Analysis (HACCP). QAD solutions are used from the
primary produce end of the value chain to the supermarket shelf. QAD customers have a
dominant share of many markets such as the Australian beer market and Dutch bread market.
High Technology (Electronics): QAD delivers solutions for many high technology companies
whose products include semi-conductors, smart cards, telecommunications, and test and
measurement equipment. Many companies use QAD solutions to control their entire businesses,
including after sales service and support of installed equipment, managing their field
engineers schedules and using QADs mobile technology to provide system access from the
field. Our solutions fully support the nuances of engineering control and firmware revision
support. QAD customers are at the forefront of new technologies such as WiMAX (leading-edge
wireless technology), and most of the worlds smart cards are manufactured using QAD
technology.
Industrial Products: QAD delivers solutions for companies operating in many sectors of the
industrial products market including chemical manufacturers, manufacturers of oilfield
services equipment, drawn wire manufacturers and heating ventilation and air conditioning
(HVAC) companies. These companies leverage our planning, scheduling and execution
capabilities, as well as cost management functionality addressing common challenges such as
commodity material costing. QAD customers have dominant positions in the global oilfield
services equipment market and deliver most of the domestic water heaters used in China.
Life Sciences: QAD delivers solutions to companies in the life sciences market whose
products include ethical and generic pharmaceuticals, medical devices and
bio-technology. QAD addresses not only the need for agility and traceability, but also
delivers tools to support regulatory compliance with local Current Good Manufacturing
Practices (cGMPs). QAD delivers solutions to accelerate validation, maintain traceability
and control as well as ensure compliance with training and operation. QAD supports
serialization throughout the entire supply chain including compliance with Californias
ePedigree Standards. QAD customers manufacture ethical oncology drugs and innovative tools
which assist in pioneering new surgical procedures.
THE QAD STRATEGY
QADs overall vision is to provide software that enables global manufacturing companies to
continuously improve all elements of their business processes and collaborate efficiently across
their entire supply chain. QAD refers to this vision for the future as The Perfect Lean Market,
and we embrace this vision in the development of our goals and strategies.
QAD product and service strategies include:
Delivering Value to Our Customer Base. QAD aims to continuously deliver capabilities that help
our customers improve their business efficiency. By doing so, we expect to drive continued sales of
new products to our existing customers. These sales may be from new products, or they may arise as
our customers grow their organizations and license additional users of our products.
Commitment to Customers. QAD continues to cultivate strong, lasting relationships with our
customers to maintain exceptional customer loyalty and expand our capabilities within their
organizations. While the recent economic downturn caused some reduction in demand for our products
and services, our customers remained loyal. In fiscal year 2010, over 90% of prevailing maintenance
contracts were renewed demonstrating that QAD Enterprise Applications and services are mission
critical to our customers business needs. QADs commitment to the customer provides many
value-added tools as part of their maintenance and support agreement such as a range of online
learning material and, in fiscal year 2010, we delivered new operational metric capabilities as
part of the maintenance agreement.
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Leveraging Our Expertise in Key Industries. QAD has significant expertise in the
industries in which our key customers operate. Throughout all functions in our organization we are
proud to have many employees who have considerable expertise and experience gained working directly
in the industries in which our customers operate. QAD personnel are subject matter experts and
guided by extensive engagement with our customers and active participation in leading industry
associations. This allows us to develop solutions with specific capabilities to help customers in
the various industries that we serve. As a result, our customers enjoy solutions that precisely
address their needs. QAD believes this deep industry focus and expertise is a significant
differentiator versus more generalized solutions.
Leveraging Our Strong Brand Reputation in Emerging Markets. QAD customers rely on our ability
to deliver our products and services when and where they need it. With the majority of QADs
customers operating as global manufacturing companies, many have strategies to benefit from both
lower cost of operations and growing market opportunity by establishing operations in countries
with emerging economies. In order to support these customers and their strategies, we have
established operations in emerging markets. This local presence, together with products that
address local language, business practice and regulatory requirements, enables QAD customers to
choose QAD Enterprise Applications to capitalize on emerging market opportunities.
Commitment to Research and Development. QAD is continually expanding the capabilities of our
QAD Enterprise Applications suite. In support of this strategy, we invest significantly in research
and development. When appropriate, we consider acquiring businesses and technologies that
complement our capabilities. In fiscal year 2010, significant new product capabilities were
delivered in both the Standard and Enterprise editions of QAD Enterprise Applications. We will
continue to look for ways to enhance our product offerings to bring more value to our customers and
maintain our competitive edge in the marketplace.
Supporting an On Demand Environment. On Demand software deployment, also referred to as
Software as a Service (SaaS), is an evolving deployment platform for enterprise applications. In
fiscal year 2010, QAD saw an increase in interest in On Demand deployment of QAD Enterprise
Applications, which we believe is due in part, to prevailing economic conditions driving customers
to seek more rapid deployment methods at a lower initial capital investment. QAD will continue to
invest in the evolution of this deployment strategy, which we expect will continue to become more
popular as a deployment option.
Helping Customers Achieve Maximum Value from QAD Solutions. The goal of QAD Global Services
is to assist customers in achieving maximum value from QAD solutions. In pursuit of this goal, we
have established global services capabilities with highly experienced personnel located in all of
our major operating markets. As a result, QAD Global Services can help manage world-wide
deployments, providing unique global consistency and deployment standards. With QAD Global
Services deep industry expertise, combined with tools developed specifically for our customers
industries, we boast service offerings that make the job of deploying QAD solutions faster, easier
and more cost effective than competitive products.
Providing Convenient, Accessible Training and Education. To ensure our customers are receiving
optimum value using our products, QAD places high importance on delivering flexible, cost-effective
training options. With the recent economic downturn, many of our customers have experienced
organizational changes so they rely on training more than ever. To assist our customers in
maintaining their productivity amidst change, QAD offers a range of engaging and useful online
learning tools that are available to customers as part of their maintenance and support agreement.
Leverage Our Global Network of Alliances. QAD has a global network of partners which enables
greater market coverage for sales, higher market visibility and delivery of complementary products
and technologies to our customers. These partners allow us to augment our direct sales organization
with distributors and sales agents, as well as our services organizations with additional
consulting and implementation services, to ensure we can support our customers needs around the
world.
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In fiscal year 2010, global economic conditions continued to deteriorate. Economic contraction
in most countries and markets and the global financial market instability has caused a significant
reduction in demand for many manufacturing companies, which has impacted our customers, and in
turn, has impacted QAD. We have seen demand for our products and services decline in each of our
major geographies and in all of the industries we serve. This has negatively impacted our revenues
for fiscal year 2010. In response to these market conditions, we carried out a number of
strategies aimed at cost containment, including reducing our headcount. These actions have
improved our financial results during the second half of fiscal year 2010. In addition, we embarked
on a number of short-term initiatives to assist customers in addressing challenges they faced in
relation to the global economic crisis. These initiatives have allowed us to clearly understand our
customers needs. Although the outlook remains uncertain, we have seen some growth in demand in
some sectors and will continue to have a strong focus on supporting our customers as the economy
improves. We continue to pursue our product and services strategies in pursuit of our vision for
the Perfect Lean Market.
QAD SOLUTIONS
QAD products and services are designed to support common business processes employed by global
manufacturing companies. We continuously monitor emerging requirements and business practices and
incorporate them into the product strategy for our solutions. We strive to make QAD Enterprise
Applications simple to implement and easy to use. QAD achieves this by delivering predefined
business processes that reflect common best practices for our customers industries.
QADs focus on business process efficiency has led to the development of a tool with
integrated process maps covering all business processes. This tool, the QAD Process Editor,
simplifies implementation, maps all common business processes and facilitates navigation throughout
the entire product suite.
At implementation, customers can map their specific business processes and attach operating
procedures and other relevant information which can be referred to when the system is in
production. This greatly reduces the burden of documenting business processes and operating
procedures and significantly accelerates implementation.
Process maps enable users to visualize how business processes at their company are configured.
This makes it easier for users to understand the flow of information and material throughout their
business and to understand the context of their particular role. In addition, QAD process maps are
integrated into the user interface and allow users to not only see where they are in a particular
process but also to launch application functionality and navigate throughout the product following
this visual flow. This greatly reduces the challenge of training users in broad application
functionality.
The QAD Enterprise Applications suite user interface has been designed to be simple to learn
and use, and has exceptional interface design. We have invested significant research and
development in the areas of human engineering and usability to enhance the user experience and
ensure the highest level of usability.
QAD customers often integrate QAD solutions with other systems they use within their
organizations. The QAD Enterprise Application suite has been developed to facilitate integration at
a number of different layers within the architecture. For example, we enable seamless integration
with all desktop applications. Users can simply link to any resources available on the internet
from their desktop. QAD Enterprise Applications can support operation on many relational database
platforms and can connect to many different data sources. QAD Enterprise Applications also provides
a capability to allow simple integration, using the Q-Xtend toolset, to other software applications
and web services. This enables customers to connect to different software, even when remote, and to
use industry standard middleware products such as MQ series or the Sonic Enterprise Service Bus
(ESB).
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QAD ENTERPRISE APPLICATIONS
QAD Enterprise Applications is an integrated suite of software applications which support the
core business processes of global manufacturing companies. The suite has been built with specific
functionality to address the needs of customers in targeted industries. QAD Enterprise Applications
allow manufacturers to monitor, control, and support their operations whether operating a single
plant or multiple plants, wherever they are located in the world. QAD Enterprise Applications
supports multiple deployment methods, including On Premise (system is installed on a customers
computer), On Demand (system is accessible remotely via the Web in a SaaS model), On Appliance
(system is delivered on a machine that QAD remotely supports and administers) or a hybrid of these
options. Blended deployment is a key differentiator for QAD that allows customers to choose how
they deploy their business solutions based on their unique business needs.
The QAD Enterprise Applications suite has evolved over time to address a broader range of
business processes as our customers needs have changed. Today, QAD Enterprise Applications is
available in two editions, the Standard Edition and Enterprise Edition. The Enterprise Edition
provides supplementary capabilities to the Standard Edition which assists companies with
significant global complexities in their business models. QAD Enterprise Applications are comprised
of the suites detailed below.
QAD Financials
QAD Financials provides advanced capabilities to manage and control fiscal business processes
at a local, regional and global level. It supports multi-company, multi-currency, multi-language
and multi-tax jurisdictions, as well as robust consolidated reporting and budgeting controls. These
capabilities give cross-functional stakeholders instant access to their companys entire financial
position enabling faster, more informed decision making. The QAD Financials suite covers both
transactional accounts and corporate finance requirements.
QAD Customer Management
The QAD Customer Management suite enables global manufacturers to acquire new customers
efficiently, grow revenue through multiple channels and retain customers through superior service
and support. Our customers rely on our customer management solutions to run and measure marketing
campaigns, manage sales opportunities throughout the full life cycle, optimize the order and
fulfillment process, enable customer self-service, anticipate customer demand and ensure customer
retention through coordination of multiple service channels.
QAD Manufacturing
QAD Manufacturing provides a total solution for building a strong operational foundation in
the areas of planning and scheduling, cost management, material control, shop floor control and
reporting in various mixed-mode manufacturing environments. This includes discrete, repetitive,
kanban (token-based visual control), flow, batch/formula process and co-product/by-products
manufacturing environments.
This suite is designed to enable companies to deploy business processes in line with their
industrys best practices. The integration between scheduling, planning, execution and materials
allows tight control and simple management of processes.
QAD Supply Chain
QAD Supply Chain is a comprehensive group of applications that fulfills the diverse materials
planning and movement requirements of small or large global companies. This solution set delivers
functionality and capabilities that help manufacturers drive margin and cost improvements, enhance
customer satisfaction and meet industry compliance requirements. Manufacturers can align supply and
demand to support the delivery of the right product, to the right place, at the right time, at the
right cost.
QAD Supply Chain is designed to address simple or complex networks with enhanced functionality
available as the enterprise grows. Collaborative portals are available for both demand and supply
side needs.
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QAD Service and Support
The QAD Service and Support product suite enables exceptional customer service and support
after the sale, providing a key opportunity for businesses to differentiate themselves from the
competition. Designed to ensure customer satisfaction, the QAD Service and Support suite handles
service calls, manages service queues and organizes mobile field resources. Combined with extensive
project management support, organizations can track materials and labor against warranty and
service work, compare actual costs to budget and generate appropriate invoicing.
QAD Enterprise Asset Management
QAD Enterprise Asset Management is an integrated plant operation solution that enables
companies to operate global manufacturing plants smoothly and keep equipment running at the lowest
cost. The QAD Enterprise Asset Management suite manages assets from inception through operations
and replacement. This suite is a critical component of many global manufacturers systems today.
QAD Transportation Management
The QAD Transportation Management suite streamlines transportation processes, reduces costs
and ensures global compliance. QAD Transportation Management addresses the needs of distributors
and manufacturers in the key areas of global trade management, freight management and trade
compliance. QAD markets its QAD Transportation Management suite directly to existing manufacturing
customers and, using the Precision Software brand, markets outside QADs manufacturing customer
base to the broader marketplace demanding transportation management solutions.
QAD Analytics
QAD Enterprise Applications contains a wealth of information for use by customers to improve
their manufacturing operations. Using QAD Analytics, this information can be used to perform
complex analysis, enabling better decision-making and improved performance management. In fiscal
year 2010, QAD announced availability of extended capabilities called Operational Metrics.
Operational Metrics allow all users to establish key performance indicators (KPIs) and visualize
exceptions and conditions against them, helping to measure the efficiency and effectiveness of an
operation or process.
QAD Interoperability
QAD Enterprise Applications is built on a Services Oriented Architecture (SoA). Different
elements of the core and extended suite communicate via QADs messaging and services layer
called QAD QXtend, which allows customers to integrate QAD Enterprise Applications to other core
applications used in their business, from in-house software to other Web Services. This open
interoperability offers QAD customers a choice of technologies in their software environments. Ease
of integration also provides lower cost of ownership for our customers.
QAD CUSTOMER SUPPORT
QAD Customer Support provides the resources, tools and expertise needed to maximize the use of
QAD Enterprise Applications. QADs global support professionals are focused on quick issue
resolution and uninterrupted service, so our customers can serve their customers better. In
addition, QAD Customer Support offers access to an extensive knowledgebase, online training
materials, a virtual training environment, remote diagnostics, a software download center and live
chat, all of which help customers resolve issues faster and maintain their systems for optimal
performance.
QAD GLOBAL SERVICES
With over 300 consultants in over 20 countries, QAD Global Services provides global coverage and
local expertise to help companies get the most from their QAD investment. By employing
industry-specific best practices and empowering users with training and ongoing education, QAD
Global Services helps minimize implementation risk while maximizing system value, helping customers
achieve quick return on investment and a superior ownership experience.
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QAD Global Services offers the following:
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Implementation Services Includes implementations, core model development and rollout,
customization development, training, installations and reporting services; |
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On Demand and Application Management Services Includes service delivery management,
application life cycle management, help desk support, systems management and infrastructure
management services; |
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Migration and Upgrade Services Includes technical conversions, service pack upgrades,
customization upgrades, migrations to current releases of QAD Enterprise Applications and
upgrade assessments; and |
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Business Consulting Services Includes strategic consulting, business optimization
services, business metrics improvement, health checks, return on investment tools and
MMOG/LE assessments. |
QAD Global Services is focused on helping customers reduce their operating costs while
improving key business processes using QAD Enterprise Applications.
QAD EDUCATION
QAD Education delivers an extensive course curriculum in a variety of convenient formats
allowing QAD customers to fully leverage the extensive capabilities of QAD Enterprise Applications.
QAD understands the importance of ongoing education and the need for flexible instruction options.
For this reason QAD Education includes instructor-led training (either in classroom or live via
distance learning), independent online learning modules, self-study training guides with direct
access to the software for hands-on practice and custom courses tailored to meet specific company
needs and delivered on site.
Course offerings are designed for QAD Enterprise Applications end users, IT professionals and
department managers helping them gain the skills required to achieve top performance.
QAD STRATEGIC ALLIANCES
We have a number of ongoing business alliances with companies to extend the functionality of
our software solutions by delivering applications with specific functionality required by our
customers and supporting various hardware platforms. We have also entered into some arrangements
with third-party software developers who provide functionality that has been embedded into or
integrated with QAD software. We continue to form alliance arrangements in order to deliver more
complete solutions for both the manufacturing industries we serve and to provide key technology
elements. Our alliances include, but are not limited to Progress Software Corporation and Microsoft
Corporation.
COMPETITION
Industry consolidation has been a primary factor shaping the ERP software marketplace. We
believe the competition can be regarded as falling into two broad categories generalist and
specialist. SAP, Oracle, Infor and Microsoft Dynamics hold the largest market share of the broad
ERP marketplace. These companies are diverse generalists addressing the needs of many industries.
Niche ERP providers or specialists include Epicor and Lawson. The specialist companies typically
focus on specific industries, or niches, within industries. QAD is well positioned to compete with
providers in each of these categories based on proven global deployments, deep manufacturing
capabilities and flexible deployment models.
There is an emerging category of competitors who solely deliver SaaS solutions. However, to
date, these companies represent a minimal share of the marketplace and lack the capability to
support global manufacturers.
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QAD offers an Enterprise Application suite that addresses the operational requirements of
global manufacturers. In this space, QAD competes against the large generalists as well as a
number of smaller, local companies that provide a variety of offerings. The scalability of QAD
Enterprise Applications allows companies with as few as five users or thousands of users to use the
same applications. This scalability means local companies can also deploy the same applications
that are deployed by global companies. QAD differentiates itself in this space by focusing on
manufacturing capabilities and by further focusing on industries inside of the manufacturing
markets it serves. The generalists have broad market footprints developing
applications targeted at many industries, not specifically for manufacturers. As a result, QAD
applications are generally easier and less expensive to implement and support over time than those
of its larger competitors.
QAD has delivered QAD Supply Visualization (SV), also referred to as QADs supply chain
portal, as software as a service since 2004. In 2007, QAD introduced QAD Enterprise Applications
as On Demand. Of our competitors, SAP and Oracle deliver hosted offerings and a number of smaller
companies have discrete offerings available On Demand. Currently demand for this market is
relatively small and represents less than 5% of QADs annual revenue, which is in line with overall
market trends. QAD believes it is well positioned as this market continues to evolve.
From a competitive perspective, ERP providers of all sizesglobal, regional and localoften
compete for the same business in a given market. QAD continues to differentiate itself by providing
deep industry expertise and solutions that are simple to use and implement and have a lower
operating cost over time.
TECHNOLOGY AND PRODUCT DEVELOPMENT
QAD places considerable focus on the underlying technology used to develop QAD Enterprise
Applications. Our goal is to allow customers to choose how they deploy their software applications.
QAD Enterprise Applications is designed to integrate easily with other systems in order to adapt to
customers requirements. QADs philosophy is to embrace open components to allow customers to
operate on a number of different operating systems, hardware platforms and underlying databases
when deploying their software applications. In recent years, we have transitioned our applications
architecture to Services Oriented Architecture, further enabling components of QAD Enterprise
Applications to communicate with one another through industry-standard messaging techniques.
Additionally, our customers can harness other Web services to deliver the full benefit to their
businesses.
QAD Enterprise Applications have been developed using a variety of commonly available and
widely supported development environments. The most significant toolsets used include components
developed by Progress Software Corporation (Progress), Microsoft (.Net Framework) and Sun
Microsystems (Java). QAD Enterprise Applications operates on a variety of common database
platforms, including those provided by Progress, Oracle and Microsoft. QAD Enterprise
Applications supports most commercial operating systems, including most LINUX-derived operating
systems, Windows Server System 2003/2008 and most proprietary versions of UNIX. Where practical,
QAD endeavors to ensure that QAD Enterprise Applications can support collaboration and integration
with other systems using open industry standards.
At the foundation of QAD Enterprise Applications is QADs domain architecture. This
architecture allows global customers greater flexibility in deciding how to deploy their systems.
It permits them to select centralized, decentralized or hybrid computing architectures with parts
of their enterprise running from both central resources and local resources. Using QADs domain
architecture, QAD customers have the ability to configure their systems to support dynamic business
models, as well as change their systems with minimal reconfiguration in order to reflect
modifications in their business structure. QADs domain architecture has been designed to enable
QAD customers to deploy their systems across a global enterprise more rapidly than older system
architectures and to allow them to reconfigure their systems easily in the event of changes, such
as divestment or acquisitions.
In recent years, QAD has invested
heavily in the development of software that is simple and intuitive to users, requires minimal
training and delivers high functionality. QAD has made significant investment in the development of
its User Interface technology and now has a single interface for most of its software applications.
User Interface technology enables users to harness common functions such as reporting and inquires,
regardless of which part of the software application they use. Customers also benefit from simple
navigation and the ability to visualize their roles in the context of visual process maps. QADs
goal is to ensure that users find QAD Enterprise Applications simple and pleasing to use in their
day-to-day roles. Throughout the year, QAD delivered additional capabilities in many areas of our
product suite, including advanced manufacturing capabilities for visual planning of production and
capabilities for process manufacturers. In addition, several implementations of our Enterprise
Financials suite went into production with a number of large global customers.
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RESEARCH AND DEVELOPMENT
QADs research and development (R&D) organization develops new products and enhances existing
products to address the evolving needs of our customers. R&D teams are focused on the underlying
functional areas of our application suite such as financials, supply chain, manufacturing, customer
management and analytics as well as the foundation and technology of our applications, user
interface and usability.
QAD develops new or enhanced features to its products based on extensive customer feedback. In some cases, QAD R&D teams will work jointly
with customers to develop functionality that meets precise industry needs and introduces innovative
capabilities to our product suite. This customer driven development validates market requirements
and accelerates product development, ensuring that we bring the right products to market at the
right time to meet our customers needs. QAD generally makes new releases available in March and September of each year.
QAD operates as a global R&D organization with R&D offices in the United States, India,
China, Ireland, Australia and Belgium. QAD embraces agile development methods to ensure rapid and
high quality delivery of products.
Our R&D expenses totaled $37.3 million, $43.1 million and $41.1 million in fiscal years 2010,
2009 and 2008, respectively.
SALES AND MARKETING
QAD sells its products and services through direct and indirect sales channels located
throughout the world in the following four regions: North America; Latin America; Europe, Middle
East and Africa; and Asia Pacific. Each region leverages global standards and systems to ensure
consistency when interacting with global customers. In addition, we have a global strategic
accounts team (SAT) which is responsible for the management of QADs largest global customers.
Our direct sales organization includes approximately 70 commissioned sales people. We
continually align our sales organization and business strategies with market conditions in order to
maintain an effective sales process. Within each territory, a focus on the industries we serve is
cultivated through marketing, local product development and sales training.
Our indirect sales channel consists of over 50 distributors and sales agents worldwide. We do
not grant exclusive rights to any of our distributors or sales agents. Our distributors and sales
agents primarily sell independently to companies within their geographic territory, but may also
work in conjunction with our direct sales organization. We also leverage our relationships with
implementation service providers, hardware vendors and other third parties to identify sales
opportunities on a global basis.
Our marketing strategy is to build QADs brand and develop demand for our products by openly
and consistently communicating with QAD customers, prospects, partners, investors and other key
audiences. Our main objective is to shape and strengthen these valuable business relationships,
leading to increased awareness and revenue-driving leads. Through globally integrated marketing
campaigns, which are frequently executed at the regional and local levels, we are able to maintain
close contact with our key audiences through media, analyst relations, customer events, Web-based
communications, the development of sales tools to support our field
sales organization, and our
direct and indirect marketing efforts.
9
EMPLOYEES
As of January 31, 2010, we had approximately 1,350 full-time employees, including
approximately 550 in support and services, 350 in research and development, 250 in sales and
marketing and 200 in administration. Generally, our employees are not represented by collective
bargaining agreements. However, certain employees of our Netherlands and French subsidiaries are
represented by statutory works councils as required under local law. Employees of our Brazilian
subsidiary are represented by a collective bargaining agreement with the Data Processing Union.
SEGMENT REPORTING
We operate in a single reporting segment. Geographical financial information for fiscal years
2010, 2009 and 2008 is presented in note 14 within the Notes to Consolidated Financial Statements
included in Item 15 of this Annual Report on Form 10-K.
AVAILABLE INFORMATION
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K
and amendments filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934, as amended, are available free of charge on our website at www.qad.com, as soon as
reasonably practicable after such reports have been electronically filed or otherwise furnished to
the Securities and Exchange Commission. We are not including the information contained on our
website as part of, or incorporating it by reference into, this annual report on Form 10-K.
10
We operate in a rapidly changing environment that involves significant risks. The following
discussion highlights some of these risks and their potential impact on our future results and the
market price of our stock. These risks may also cause our results to differ from those discussed
in the forward-looking statements described elsewhere in this Form 10-K.
THE EFFECTS OF THE RECENT GLOBAL ECONOMIC CRISIS MAY CONTINUE TO IMPACT OUR BUSINESS, OPERATING
RESULTS AND FINANCIAL CONDITION
The Companys operations and performance are impacted by worldwide economic conditions. The
current recession and ongoing uncertainty about current global economic conditions may negatively
affect our business, operating results and financial condition as consumers and businesses may
continue to postpone spending in response to tighter credit, unemployment and negative financial
news. Uncertainty about current global economic conditions could also increase the volatility of
the Companys stock price.
RISK OF FLUCTUATIONS IN REVENUE AND EXPENSE
Because of the significant fluctuations in our revenue, period-to-period comparisons of our
revenue or profit may not be meaningful. Our quarterly and annual operating results have
fluctuated in the past and may do so in the future. As a result, period-to-period comparisons
should not be relied upon as indications of future performance. Moreover, there can be no assurance
that our revenue will grow in future periods or that we will be profitable on a quarterly or annual
basis.
A significant portion of our revenue in any quarter may be derived from a limited number of
large, non-recurring license sales. We may experience large individual license sales, which may
cause significant variations in license fees. We also believe that the purchase of our products is
discretionary and generally involves a significant commitment of a customers capital resources.
Therefore, a downturn in any significant customers business could have a significant adverse
impact on our revenue and profit.
The services business may fluctuate. Services revenue remains a substantial part of our
business. Services revenue is dependent upon the timing and size of customer orders to provide the
services, as well as upon our related license sales. In addition, continuous engagement services,
such as Application Management Services (AMS) offerings, may involve fixed price arrangements and
significant staffing which inherently involve certain risks. Business conditions associated with
the delivery of services may negatively affect the margin on such revenue. To the extent that we
are not successful in securing orders from customers to provide services, or to the extent we are
not successful in achieving the expected margin on such services, our results may be negatively
affected.
A significant portion of our revenue is derived from our existing installed base of customers
continuing to license additional products, purchase consulting services and renew their maintenance
agreements. Significant portions of our license revenues, maintenance revenues and consulting
revenues are generated from the Companys installed base of customers. Maintenance and support
agreements with these customers are traditionally renewed on an annual basis at the customers
discretion, and there is normally no requirement that a customer renew or that a customer pay new
license or service fees to QAD following the initial purchase. For example, as a result of the
recent economic downturn, some customers have not renewed their maintenance and support agreements.
If our existing customers do not renew their maintenance agreements or fail to purchase new user
licenses or product enhancements or additional services at historical levels, our revenues and
results of operations could be materially impacted.
Our maintenance renewal rate is dependent upon a number of factors such as our ability to
continue to develop and maintain our products, our ability to continue to recruit and retain
qualified personnel to assist our customers, and our ability to promote the value of maintenance
for our products to our customers. Maintenance renewals are also dependent upon factors beyond our
control such as technology changes and their adoption by our customers, budgeting decisions by our
customers, changes in our customers strategy or ownership and attempts by our competitors to
replace our products with their own. If our maintenance renewal rate was to fall, our revenue would
be adversely affected.
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Fixed expense level is based on expected revenues. Our expense level is relatively fixed and
is based, in significant part, on expectations of future revenue. If revenue levels fall below
expectations, expenses could be disproportionately high as a percentage of total revenue, which
would adversely affect our operating results.
Restructuring costs incurred in response to the global economic crisis have been costly and
additional actions may be required. We have incurred restructuring costs as we more closely align
our costs with our revenue levels. In taking these actions, we have incurred additional costs in
the short term that we have attempted to balance against the longer term benefits. Conditions may
require that we take additional restructuring actions in the future.
Health care reform in the United States could increase the costs of maintaining our health
benefit programs. Newly-enacted legislation addressing health care reform could have a
significant ongoing impact on our tax liabilities and the costs of maintaining our employee health
benefit programs, which would significantly impact our annual net income and cash flows.
We may have exposure to additional tax liabilities. As a multinational organization, we are
subject to income taxes as well as non-income taxes in the United States and in various foreign
jurisdictions. Significant judgment is required in determining our worldwide income tax provision
and other tax liabilities. In the ordinary course of a global business, there are many intercompany
transactions and calculations where the ultimate tax determination is uncertain. Although we
believe that our tax estimates are reasonable, the final determination of tax audits or tax
disputes may differ from what is reflected in our historical income tax provisions and accruals. We
are also subject to non-income taxes, such as payroll, sales, use, value-added, net worth, property
and goods and services taxes, in the United States and in various foreign jurisdictions.
Our tax rate may increase, which could increase our income tax expense and reduce our net
income. Our tax rate could be adversely affected by several factors, many of which are outside of
our control, including:
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Changes in the relative proportions of revenues and income before taxes in various
jurisdictions; |
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Changing tax laws, regulations and interpretations thereof; |
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Changes in accounting and tax treatment of stock-based compensation; |
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Tax effects of purchase accounting for acquisitions and restructuring charges that may
cause fluctuations between reporting periods; |
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Changes to the valuation allowance on net deferred tax assets; |
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Assessments and any related tax interest or penalties; and |
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Discrete items which are not related to income. |
We report our results of operations based on our determinations of the amount of taxes owed in
the various tax jurisdictions in which we operate. Periodically, we may receive notices that a tax
authority to which we are subject has determined that we owe a greater amount of tax than we have
reported to such authority, in which case, we may engage in discussions or possible disputes with
these tax authorities. If the ultimate determination of our taxes owed in any of these
jurisdictions is for an amount in excess of the tax provision we have recorded or reserved for, our
operating results, cash flows, and financial condition could be adversely affected.
RISKS ASSOCIATED WITH SALES CYCLE
Our products involve a long sales cycle and the timing of sales is difficult to predict.
Because the licensing of our primary products generally involves a significant commitment of
capital or a long-term commitment by our customers, the sales cycle associated with a customers
purchase of our products is generally lengthy. This cycle varies from customer to customer and is
subject to a number of significant risks over which we have little or no control. The evaluation
process that our customers follow generally involves many of their personnel and requires complex
demonstrations and presentations to satisfy their needs. Significant effort is required from QAD to
support this approach, whether we are ultimately successful or not. If sales forecasted for a
particular quarter are not realized in that quarter, then we are unlikely to be able to generate
revenue from alternative sources in time to compensate for the shortfall. As a result, a lost or
delayed sale could have an adverse effect on our quarterly and/or annual operating results.
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In some cases we provide a portion of the customer solution that involves third parties during
the sales cycle. While we believe we have established a robust global support and services
organization over the past several years, we continue to rely on third parties for a portion of our
implementation and systems support services. We also occasionally cooperate with third party
software providers of point solutions as part of an overall proposal. In some situations, such as
when these third parties are the primary contractor or otherwise an essential party to a larger
arrangement, this reliance on third parties may cause sales cycles to be lengthened and may result
in the loss of sales.
We have historically recognized a substantial portion of our revenue from sales booked and
shipped in the last month of a quarter. As a result, the magnitude of quarterly fluctuations in
license fees may not become evident until the end of a particular quarter. Our revenue from license
fees in any quarter is substantially dependent on orders booked and shipped in that quarter.
We must hire and retain highly skilled sales and marketing personnel to be successful in the
sales cycle. We cannot ensure that we will be successful in hiring and retaining appropriate sales
and marketing personnel in accordance with our plans. Neither can there be assurance that our
recent and planned strategies in sales and marketing will ultimately prove to be successful. In
addition, our sales and marketing organization may not be able to compete successfully against the
significantly more extensive and better funded sales and marketing operations of many of our
current and potential competitors.
DEPENDENCE ON THIRD-PARTY SUPPLIERS
We are dependent on Progress Software Corporation. The majority of QAD Enterprise
Applications are written in a programming language that is proprietary to Progress Software
Corporation (Progress). These QAD Enterprise Applications do not run within programming
environments other than Progress and therefore our customers must acquire rights to Progress
software in order to use these QAD Enterprise Applications. We have an agreement with Progress
under which Progress licenses us to distribute and use Progress software related to our products.
This agreement remains in effect unless terminated either by a written three-year advance notice or
due to a material breach that is not remedied.
Our success is dependent upon our continuing relationship with Progress. It is also dependent
upon Progress continuing to develop, support and enhance its programming language, its toolset and
its database, as well as the continued market acceptance of Progress as a standard database
program. We have in the past, and may in the future, experience product release delays because of
delays in the release of Progress products or product enhancements. Any of these delays could have
an adverse effect on our business.
We are dependent on other third-party suppliers. We have in the past, and may in the future,
resell certain software which we license from third-parties, other than Progress. We also have in
the past, and may in the future, jointly develop software in which we have co-ownership or
cross-licensing rights or grant rights for the resulting software to operate with our products.
There can be no assurance that these third-party software arrangements and licenses will continue
to be available to us on terms that provide us with the third-party software we require, provide
adequate functionality in our products on terms that adequately protect our proprietary rights, or
are commercially favorable to us.
Certain QAD Enterprise Applications are developed using embedded programming tools from
Microsoft and Sun Microsystems for the Microsoft.NET framework and Java Programming environments,
respectively. We rely on these environments continued compatibility with customers desktop and
server operating systems. In the event that this does not occur, some of our customers may not be
able to easily upgrade their QAD software. We also have exposure from the present method of
licensing the .NET framework in that it is currently provided as part of Microsofts Desktop
Operating systems. If this policy changed and a price was applied to the .NET framework, our
expenses could increase substantially. We also have exposure resulting from Oracles acquisition of
Sun Microsystems in January 2010 in that Oracle could potentially decide to charge fees or
otherwise change the historical licensing terms for Java technology. If Oracle were to make such a
decision our expenses could increase substantially. For both of the .Net and Java elements, we rely
on market acceptance and maintenance of these environments and we may be adversely affected if
these were withdrawn or superseded in the market.
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We also maintain development, product, and supplier services alliances with other
third-parties. These alliances include software developed to be sold in conjunction with QAD
Enterprise Applications, technology developed to be included in or encapsulated within QAD
Enterprise Applications, joint development efforts with partners or customers, and products and
numerous third-party software programs that generally are not sold with QAD Enterprise
Applications, but interoperate directly with QAD Enterprise Applications. We also have a service
provider agreement for the provision of certain infrastructure related to our On Demand offerings.
Our strategy may include additional investment in research and development efforts involving third
parties, as well as a greater focus on potential acquisitions to aid in expanding the breadth of
the product line.
Our partner agreements, including development, product acquisition and reseller agreements
contain appropriate confidentiality, indemnity and non-disclosure provisions for the third-party
and end-user. Failure to establish or maintain successful relationships with these third parties or
failure of these parties to develop and support their software, provide appropriate services and
fulfill other agreement obligations could have an adverse effect on us. We have been in the past,
and expect to be in the future, party to disputes about ownership, license scope and royalty or fee
terms with respect to intellectual property.
RAPID TECHNOLOGICAL CHANGE
The market for QAD Enterprise Applications is characterized by rapid technological change.
Customer requirements for products can change rapidly as a result of innovation or change within
the computer hardware and software industries, the introduction of new products and technologies
and the emergence of, adoption of, or changes to, industry standards including those related to
consolidation in the industry. Our future success will depend upon our ability to continue to
enhance our current product line and to develop and introduce new products that keep pace with
technological developments, satisfy increasingly sophisticated customer requirements, keep pace
with industry and compliance standards and achieve market acceptance. Our failure to successfully
develop or acquire and market product enhancements or new products could have an adverse effect on
us.
New software releases and enhancements may adversely affect our software sales. The actual or
anticipated introduction of new products, technologies and industry standards can render existing
products obsolete or unmarketable or result in delays in the purchase of those products.
Significant delays in launching new products may also jeopardize our ability to compete. Failure by
us to anticipate or respond to developments in technology or customer requirements, significant
delays in the introduction of new products or failure by us to maintain overall customer
satisfaction could have an adverse effect.
PROPRIETARY RIGHTS AND LICENSING
Our success is dependent upon our proprietary technology and other intellectual property. We
rely on a combination of protections provided by applicable copyright, trademark, patent and trade
secret laws, as well as on confidentiality procedures and licensing arrangements, to establish and
protect our rights in our software and related materials and information. We enter into license
agreements with each of our customers and these license agreements provide for the non-exclusive
license of QAD Enterprise Applications. These licenses generally are perpetual, although our On
Demand licensing strategy involves term (or subscription) licenses. Our license contracts contain
confidentiality and non-disclosure provisions, a limited warranty covering our applications and
indemnification for the customer from infringement actions related to our applications.
Our pricing and licensing models may affect our ability to compete. Our pricing policy is
based on a standard price list and may vary based on different parameters, including the number of
end-users, number of sites, number of modules, perpetual licenses versus term licenses, number of
languages, length of time, the country in which the license is granted and level of ongoing
support, training and services to be provided by QAD. Our ability to offer competitive pricing
models in response to the market is also a risk. There are no assurances that our current and
future licensing models will be accepted in the market place or will yield revenue comparable to
that of past licensing models.
We license our source code to our customers, which makes it possible for others to copy or
modify our software for impermissible purposes. We generally license our software to end-users in
both object code (machine-readable) and source code (human-readable) formats. While this practice
facilitates customization, making software available in source code also makes it possible for
others to copy or modify our software for impermissible purposes. Our license agreements generally
allow the use of our software solely by the customer for internal purposes without the right to
sublicense or transfer the software to third-parties.
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We believe that the measures we take to protect our intellectual property afford only
limited protection. Despite our efforts, it may be possible for others to copy portions of our
products, reverse engineer them or obtain and use information that we regard as proprietary, all of
which could adversely affect our competitive position. Furthermore, there can be no assurance that
our competitors will not independently develop technology similar to ours. In addition, the laws of
certain countries do not protect our proprietary rights to the same extent as the laws of the
United States.
The success of our business is highly dependent on maintenance of intellectual property
rights. The unauthorized use of our intellectual property rights may increase the cost of
protecting these rights or reduce our revenues. We may initiate, or be subject to, claims or
litigation for infringement of proprietary rights or to establish the validity of our proprietary
rights, which could result in significant expense to us, cause product shipment delays, require us
to enter royalty or licensing agreements and divert the efforts of our technical and management
personnel from productive tasks, whether or not such litigation were determined in our favor.
We may be exposed to product liability claims. While our license agreements with our
customers typically contain provisions designed to limit our exposure to potential material product
liability claims, including appropriate warranty, indemnification, waiver and limitation of
liability provisions, it is possible that such provisions may not be effective under the laws of
some jurisdictions.
We have an errors and omissions insurance policy. However, this insurance may not continue to
be available to us on commercially reasonable terms or at all. We may be subject to product
liability or errors or omissions claims that could have an adverse effect on us. Moreover,
defending a suit, regardless of its merits, could entail substantial expense and require the time
and attention of key management personnel.
ENTERPRISE APPLICATION SOLUTIONS
The market for enterprise applications is uncertain and we are substantially dependent on our
core product suite, QAD Enterprise Applications. A significant element of our strategy is the
acceptance of QAD Enterprise Applications, including in particular, modules formerly marketed under
the MFG/PRO brand. We derive a significant portion of our revenue from software license and
maintenance revenue attributable to this product suite and from other complimentary products that
are generally licensed only in conjunction with this suite. The failure of QAD Enterprise
Applications and related products to continue to have market acceptance for license sales and
maintenance renewals would adversely affect our business. In addition, we have invested, and expect
to continue to invest, substantial resources developing and enhancing the various product suites
that make up QAD Enterprise Applications. If QAD Enterprise Applications fails to maintain
acceptance in the marketplace, it may not yield the return on investment we expect.
We may not retain or attract customers if we do not develop new products and enhance our
current products in response to technological changes and competing products. The enterprise
application market is faced with rapid technological change, evolving standards in computer
hardware, software development and communications infrastructure, as well as changing customer
needs. Building new products requires significant development investment. A substantial portion of
our research and development resources is devoted to product upgrades that address new technology,
regulatory and maintenance requirements, thereby putting constraints on our resources available for
new product development. In addition, part of our strategy is to acquire certain products to extend
and enhance our product offering. The continued success of QAD Enterprise Applications will depend
on our ability to successfully develop, enhance and globalize these offerings and distribute,
service and support them internationally. We also face uncertainty when we develop or acquire new
products because there is no assurance that a sufficient market will develop for those products.
QAD Enterprise Applications are often deployed in complex systems and may contain defects or
security flaws. Because our products are often deployed in complex systems, they can only be fully
tested for reliability when deployed in such systems and may require long periods of time for such
testing. Our customers may discover defects in our products, experience corruption of their data or
encounter performance or scaling problems only after our software programs have been deployed. In
addition, our products are combined with products from other vendors. As a result, should problems
occur, it may be difficult to identify the source of the problem. Software and data security are
becoming increasingly important because of regulatory restrictions on data privacy and the
significant legal exposure and business disruption stemming from computer viruses and other
unauthorized entry or use of computer systems. Product defects and security flaws could expose us
to product liability and warranty claims and harm our reputation, which could impact our future
sales of products and services.
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Our revenue and profitability could suffer if we do not manage the risks associated with
our On Demand business properly. The size and significance of the On Demand portion of
our business has increased in recent periods. The risks that accompany that business differ from
those of our other businesses and include the following:
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The pricing and other terms of some of our On Demand agreements require us to make
estimates and assumptions at the time we enter into these contracts that could differ
from actual results. Any increased or unexpected costs or unanticipated delays in
connection with the performance of these engagements, including delays caused by factors
outside our control, could make these agreements less profitable or unprofitable, which
would have an adverse affect on the profit margin of our On Demand business. |
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Some of our On Demand agreements require investment in the early stages that is
expected to be recovered through billings over the life of the agreement. These
agreements often involve new information technology systems and communications networks. |
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We manage critical customer applications, data and other confidential information
through our On Demand offerings. Accordingly, we face increased exposure to significant
damage claims and risk to our reputation and future business prospects in the event of
system failures, inadequate disaster recovery or loss or misappropriation of customer
confidential information. |
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We may face regulatory exposure in certain areas such as data privacy, data security
and export compliance. |
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The laws and regulations applicable to hosted service providers are unsettled,
particularly in the areas of privacy and security and use of global resources; changes
in these laws could affect our ability to provide services from or to some locations and
could increase both the costs and risks associated with providing the services. |
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Demand for our services may be affected by customer and media concerns about security
risks, international transfers of data, government or other third-party access to data,
and/or use of outsourced services providers. |
MARKET CONCENTRATION
We are dependent upon achieving success in certain concentrated markets. We have made a
strategic decision to concentrate our product development, as well as our sales and marketing
efforts, in certain primary vertical industry segments: automotive, consumer products, high
technology, food and beverage, industrial products and life sciences. An important element of our
strategy is the achievement of technological and market leadership recognition for our software
products in these segments. The failure of our products to achieve or maintain substantial market
acceptance in one or more of these segments could have an adverse effect on us. If any of these
targeted industry segments experience a material slowdown in expansion, that downturn would
adversely affect the demand for our products.
DEPENDENCE UPON DEVELOPMENT AND MAINTENANCE OF THIRD-PARTY RELATIONSHIPS TO PROVIDE SALES, SERVICES
AND MARKETING FUNCTIONS
We are dependent upon the development and maintenance of sales and marketing channels. We
sell and support our products through direct and indirect sales, services and support organizations
throughout the world. Our indirect sales channel consists of over 50 distributors and sales agents
worldwide that we refer to as sales channels. We do not grant exclusive distribution rights to our
sales channels. Our sales channels primarily sell independently to companies within their
geographic territory, and may work in conjunction with our direct sales organization. Sales derived
through indirect channels are more difficult to forecast and may have lower profit margins than
direct sales.
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We have separate agreements with our alliances, sales channels and service providers. These
agreements make available to our distributors and service providers the non-exclusive right to
promote and market QAD Enterprise Applications and to provide training, installation,
implementation and other services for QAD Enterprise Applications within a defined territory for a
specified period of time. These providers are generally permitted to set their own rates for their
services and our distributors receive a discount for the distribution of our software products.
We have certain relationships with a number of consulting and systems integration
organizations that we believe are important to our worldwide sales, marketing, service and support
activities and to the implementation of our products. QAD Global Services is designed to complement
these arrangements so that we can both subcontract our services to third-party providers or be a
sub-contractor to these providers on a global basis to meet our customers requirements. We believe
this method allows for additional flexibility in ensuring our customers needs for services are met
in a cost effective, timely and high quality manner. Our providers generally do not receive fees
for the sale of our software products unless they participate actively in a sale as a sales agent
or a distributor. We are aware that these third-party providers do not provide system integration
services exclusively for our products and in many instances these firms have similar, and often
more established, relationships with our principal competitors.
Failure to establish or maintain successful relationships with third-parties as appropriate or
failure of these third-parties to fulfill their responsibilities could have an adverse effect on
us. In addition, if these third-parties exclusively adopt a product or technology other than QAD
software products or technology, or if these third-parties reduce their support of QAD software
products and technology or increase support for competitive products or technology, we could be
adversely affected.
ACQUISITIONS AND INTEGRATION OF ACQUIRED BUSINESS AND INTELLECTUAL PROPERTY
We may make acquisitions or investments in new businesses, products or technologies that
involve additional risks. As part of our business strategy, we have made, and expect to continue
to make, acquisitions of businesses or investments in companies that offer complementary products,
services and technologies. Such acquisitions or investments involve a number of risks, including
the risks in assimilating the operations and personnel of acquired companies, realizing the value
of the acquired assets relative to the price paid, distraction of management from our ongoing
businesses and potential product disruptions associated with the sale of the acquired companies
products. These factors could have a material adverse effect on our business, financial condition
and operating results. Consideration paid for any future acquisitions could include our stock.
As a result, future acquisitions could cause dilution to existing shareholders and to earnings per
share. Furthermore, we may incur significant debt to pay for future acquisitions or investments.
CREDIT RISK
The recent global financial crisis has resulted in a tightening in the credit markets. The
recent global credit and banking crisis has caused lower levels of liquidity, increases in the
rates of default and bankruptcy and extreme volatility in credit, equity and fixed income markets.
Our current or potential customers may be unable to fund software purchases, which could cause them
to delay, decrease or cancel purchases of our products and services or not pay us or delay paying
us for previously purchased products and services. These conditions are particularly evident in the
automotive industry, which is an important industry segment for QAD.
We might require additional capital to support business growth, and this capital might not be
available. We intend to continue to make investments to support our business growth and may
require additional funds to respond to business challenges or opportunities, including the need to
develop new offerings or enhance our existing offerings, enhance our operating infrastructure or
acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or
debt financings to secure additional funds. If we raise additional funds through further issuances
of equity or convertible debt securities, our existing stockholders could suffer significant
dilution, and any new equity securities we issue could have rights, preferences and privileges
superior to those of holders of our common stock. Any debt financing secured by us in the future
could involve restrictive covenants relating to our capital raising activities and other financial
and operational matters, which may make it more difficult for us to obtain additional capital and
to pursue business opportunities, including potential acquisitions. In addition, we may not be able
to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain
adequate financing or financing on terms satisfactory to us, when we require it, our ability to
continue to support our business growth and to respond to business challenges could be
significantly limited. These risks are enhanced due to the recent global financial crisis.
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RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
Our operations are international in scope, exposing us to additional risk. For the last three
fiscal years, we derived approximately 60 percent of our total revenue from sales outside the
United States. A significant aspect of our strategy is to focus on developing business in emerging
markets. Our operating results could be negatively impacted by a variety of factors affecting our
foreign operations, many of which are beyond our control. These factors include currency
fluctuations, economic, political or regulatory conditions in a specific country or region, trade
protection measures and other regulatory requirements. Additional risks inherent in international
business activities generally include, among others:
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Longer accounts receivable collection cycles; |
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Costs and difficulties of managing international operations and alliances; |
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Greater difficulty enforcing intellectual property rights; |
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Import or export requirements; |
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Changes in political or economic conditions; and |
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Changes in regulatory requirements or tax law. |
We may experience foreign currency gains and losses. We conduct a portion of our business in
currencies other than the United States dollar. Our revenues and operating results may be
negatively affected by fluctuations in foreign currency exchange rates. Changes in the value of
major foreign currencies, including the Euro, Australian dollar, British pound, Japanese yen and
the Mexican peso relative to the United States dollar can significantly affect revenues and our
operating results.
RISKS DUE TO BUSINESS INTERRUPTIONS
If a business interruption occurs, our business could be seriously harmed. A substantial
portion of our facilities, including our corporate headquarters and other critical business
operations, are located near major earthquake faults. We also employ a third party to provide
certain infrastructure related to our On Demand offerings. Although the facilities in which
we host our computer systems, and those of our supplier, are designed to be fault tolerant and
disaster recovery procedures are in place, the systems are susceptible to damage from fire, floods,
earthquakes, power loss, telecommunications failures, the effect of software viruses, terrorist
acts, acts of war and similar events. In addition, an occurrence of any of these events may cause
damage or disruption to us and our employees, facilities, suppliers, distributors and customers,
which could have a material adverse effect on our operations and financial results.
MARKET CONDITIONS
Economic, political and market conditions can adversely affect our revenue growth and
profitability. Our business is influenced by a range of factors that are beyond our control and
for which we have no comparative advantage in forecasting. These include: (i) the overall demand
for enterprise computer software and services; (ii) conditions in the high technology and
manufacturing industry sectors; (iii) general economic and business conditions; and (iv) general
political developments and conflicts. A generally weak global economy could delay and/or decrease
customer purchases. In addition, ongoing conflicts and the potential for other hostilities in
various parts of the world continue to contribute to a climate of economic and political
uncertainty that could adversely affect our revenue growth and results of operations.
18
The enterprise application market has experienced significant consolidation and increased
competition. This consolidation has included numerous mergers and acquisitions and, as a result,
some prospective buyers are reluctant to purchase applications that could have a short lifespan due
to a potential acquisition that could result in the applications life being abruptly cut short.
QADs controlled company status makes it highly unlikely that a hostile takeover of the company
would occur. However, increased competition and consolidation in these markets is likely to result
in price reductions, reduced operating margins and changes in market share, any one of which could
adversely affect us. Several of our potential competitors enjoy substantial competitive advantages,
such as greater name recognition and greater technological and financial resources.
THE MARKET FOR OUR STOCK IS VOLATILE
Our stock price could become more volatile and investments could lose value. The market price
of our common stock and the number of shares traded each day have experienced significant
fluctuations and may continue to fluctuate significantly. The market price for our common stock
may be affected by a number of factors, including, but not limited to:
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Shortfalls in our expected net revenue, earnings or key performance metrics; |
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Changes in recommendations or estimates by securities analysts; |
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|
The announcement of new products by us or our competitors; |
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Quarterly variations in our or our competitors results of operations; |
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A change in our dividend or stock repurchase activities; |
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Developments in our industry or changes in the market for technology stocks; |
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A change in our dividend or stock repurchase activities; |
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|
Changes in rules or regulations applicable to our business; and |
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Other factors, including economic instability and changes in political or market
conditions. |
A significant drop in our stock price could expose us to costly and time consuming litigation,
which could result in substantial costs and divert managements attention and resources, resulting
in an adverse affect on our business.
FINANCIAL REPORTING
Failure to maintain effective internal controls could adversely affect our ability to meet our
reporting requirements. Effective internal controls are necessary for us to provide reasonable
assurance with respect to our financial reports and to effectively prevent fraud. Pursuant to the
Sarbanes-Oxley Act of 2002, we are required to furnish a report by management on internal
control over financial reporting, including managements assessment of the effectiveness of such
control. Internal controls over financial reporting may not prevent or detect misstatements because
of inherent limitations, including the possibility of human error, the circumvention or overriding
of controls or fraud. Therefore, even effective internal controls can provide only reasonable
assurance with respect to the preparation and fair presentation of financial statements. If we
cannot provide reasonable assurance with respect to our financial reports and effectively prevent
fraud, our operating results could be harmed. In addition, projections of any evaluation of
effectiveness of internal control over financial reporting to future periods are subject to the
risk that the control may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate. If we fail to maintain the
effectiveness of our internal controls, including any failure to implement required new or improved
controls, or if we experience difficulties in their implementation, our business and operating
results could be harmed, we could fail to meet our reporting obligations and there could be a
material adverse effect on our stock price.
We are required to delay revenue recognition into future periods for portions of our license
fee activity. Our entire worldwide business is subject to United States generally accepted
accounting principles, commonly referred to as U.S. GAAP. Under those rules, we are required to
defer revenue recognition for license fees in certain situations. Factors that are considered in
revenue recognition include those such as whether we have vendor specific objective evidence of
fair value (VSOE) for all undelivered elements in the arrangement, products under development to be
delivered at a future date, the inclusion of other services and contingencies to payment terms.
We expect that we will continue to defer portions of our license fee activity because of these
factors. The amount of license fees deferred may be significant and will vary each quarter
depending on the mix of products sold in each market and geography, as well as the actual contract
terms.
19
Impairment of intangible assets may result in charges that negatively impact our results.
Under generally accepted accounting principles, we review our goodwill and intangible assets for impairment
when events or changes in circumstances indicate the carrying value may not be recoverable. Factors
that may be considered a change in circumstances, indicating that the carrying value of our
goodwill or amortizable intangible assets may not be recoverable, include a decline in stock price
and market capitalization, reduced future cash flow estimates, and slower growth rates in our
industry. We may be required to record a significant charge in our financial statements during the
period in which any impairment of our goodwill or other intangible assets is determined,
negatively impacting our results of operations.
PRINCIPAL STOCKHOLDERS AND DEPENDENCE UPON KEY PERSONNEL
Our principal stockholders are also directors and officers. As of March 31, 2010, Karl and
Pamela Lopker jointly and beneficially owned approximately 60% of our outstanding common stock.
Karl and Pamela Lopker currently constitute two of the seven members of the board of directors and
are also officers of QAD in their capacity as CEO and President, respectively. On a combined basis,
current directors and executive officers beneficially owned approximately 60% of the common stock
as of March 31, 2010.
Karl and Pamela Lopker are not prohibited from selling a controlling interest in QAD to a
third party. Their concentrated control could discourage others from initiating any potential
merger, takeover or other change of control transaction. As a result, the market price of our
common stock could be adversely affected.
We are a controlled company. Karl and Pamela Lopker, as husband and wife, own a majority of
our common stock and we are a controlled company within the meaning of the rules of the NASDAQ.
Therefore, we are not required to comply with certain corporate governance rules of the NASDAQ that
would otherwise apply to us as a listed company on the NASDAQ.
Specifically, we are not required to have a majority of independent directors on our board of
directors and we are not required to have nominating and compensation committees composed of
independent directors. Should the interests of Karl and Pamela Lopker differ from those of other
shareholders, the other shareholders may not be afforded the protections of having a majority of
directors on the board who are independent from our principal shareholders or our management.
We are dependent upon key personnel. Our future operating results depend in significant part
upon the continued service of a relatively small number of key technical and senior management
personnel, including Chairman of the Board and President, Pamela Lopker, and Chief Executive
Officer, Karl Lopker, neither of whom is bound by an employment agreement.
Our future success also depends on our continuing ability to attract and retain other highly
qualified technical and managerial personnel. The loss of any member of our key technical and
senior management personnel or the inability to attract and retain additional qualified personnel
could have an adverse effect on us. We do not currently have key-person insurance covering any of
our employees.
Our periodic workforce restructurings can be disruptive. We have in the past restructured or
made other adjustments to our workforce in response to changes in the economy, management and
products as well as our financial results, acquisitions and other considerations. Past
restructurings have caused a temporary disruption, which can reduce employee productivity. Such
disruption could occur in connection with future restructurings and our results could be negatively
affected.
IMPACT OF REGULATION
Our business is subject to changing regulations regarding corporate governance and public
disclosure that have increased both our costs and the risk of noncompliance. We are subject to
rules and regulations by various governing bodies, including the Securities and Exchange
Commission, NASDAQ and the Public Company Accounting Oversight Board, which are charged with the
protection of investors and the oversight of companies whose securities are publicly traded.
20
These laws, regulations and standards are subject to varying interpretations and their
application in practice may evolve over time as new guidance becomes available. This evolution may
result in continuing uncertainty regarding compliance matters and additional costs necessitated by
ongoing revisions to our disclosure and governance practices. If we fail to address and comply with
these regulations and any subsequent changes, our business may be harmed.
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ITEM 1B. |
|
UNRESOLVED STAFF COMMENTS |
None.
QADs corporate headquarters are located in Santa Barbara, California. The corporate
headquarters are owned by QAD and consist of approximately 120,000 square feet situated on 28 acres
of land.
In addition to the corporate headquarters, QAD owns a facility in Dublin, Ireland and leases
over 30 offices throughout the world with lease commitment expirations occurring on various dates
through fiscal year 2020. QADs leased properties include research and development centers in the
United States, Belgium, Ireland, Australia, China and India and additional facilities in the United
States, France, Germany, Italy, Poland, South Africa, Spain, The Netherlands, United Kingdom,
Australia, China, Hong Kong, India, Japan, Singapore, Thailand, Brazil and Mexico. QAD will seek to
review lease commitments in the future as may be required. QAD anticipates that its current
domestic and international facilities are substantially sufficient to meet its needs for at least
the next twelve months.
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ITEM 3. |
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LEGAL PROCEEDINGS |
We are not party to any material legal proceedings. We are from time to time party, either as
plaintiff or defendant, to various legal proceedings and claims which arise in the ordinary course
of business. While the outcome of these claims cannot be predicted with certainty, management does
not believe that the outcome of any of these legal matters will have a material adverse effect on
our consolidated financial position or results of operations.
21
PART II
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ITEM 5. |
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MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
QAD common stock has been traded on the NASDAQ Global Market (NASDAQ) since our initial public
offering in August 1997 (under the symbol QADI). The following table sets forth the low and high
prices for QADs common stock as reported by NASDAQ in each quarter of the last two fiscal years.
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Low Price |
|
|
High Price |
|
Fiscal year 2010: |
|
|
|
|
|
|
|
|
Fourth quarter |
|
$ |
4.35 |
|
|
$ |
6.31 |
|
Third quarter |
|
|
3.66 |
|
|
|
5.13 |
|
Second quarter |
|
|
2.82 |
|
|
|
3.87 |
|
First quarter |
|
|
2.15 |
|
|
|
3.20 |
|
Fiscal year 2009: |
|
|
|
|
|
|
|
|
Fourth quarter |
|
$ |
2.56 |
|
|
$ |
5.32 |
|
Third quarter |
|
|
4.01 |
|
|
|
7.41 |
|
Second quarter |
|
|
6.57 |
|
|
|
8.02 |
|
First quarter |
|
|
7.39 |
|
|
|
8.90 |
|
Holders
As of March 31, 2010, there were approximately 250 shareholders of record of our common stock.
Because many of our shares of common stock are held by brokers or other institutions on behalf of
stockholders, we are unable to estimate the total number of stockholders represented by the record
holders.
Dividends
We declared four quarterly dividends in fiscal year 2010 of $0.025 per share of common stock.
In fiscal year 2010, we modified our dividend program to give investors the choice of receiving a
stock dividend or electing a cash dividend payment. Previously all dividends were payable in cash.
Continuing quarterly cash dividends are subject to profitability measures and liquidity
requirements of QAD.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
There was no stock repurchase activity during the three months ended January 31, 2010.
22
STOCKHOLDER RETURN PERFORMANCE GRAPH
The line graph below compares the annual percentage change in the cumulative total stockholder return on QADs
common stock with the cumulative total return of the NASDAQ Composite
Total Return Index and the NASDAQ Computer Index, on an annual basis, for the period beginning February 1, 2005 and ending January 31, 2010.
The graph assumes that $100 was invested in QAD common stock on February 1, 2005 and that all dividends were
reinvested. Historic stock price performance should not be considered indicative of future stock price performance.
COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG QAD INC., THE NASDAQ COMPOSITE TOTAL RETURN INDEX,
AND THE NASDAQ COMPUTER INDEX
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Measurement Periods |
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|
|
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|
(Annually from Fiscal |
|
|
|
|
|
|
Year 2006 through |
|
|
|
NASDAQ Composite |
|
|
Fiscal Year 2010) |
|
QAD Inc. |
|
Total Return Index |
|
NASDAQ Computer Index |
02/01/05
|
|
100.00
|
|
100.00
|
|
100.00 |
01/31/06
|
|
101.39
|
|
111.46
|
|
111.06 |
01/31/07
|
|
104.81
|
|
119.11
|
|
115.71 |
01/31/08
|
|
117.34
|
|
115.52
|
|
116.92 |
01/31/09
|
|
34.17
|
|
71.37
|
|
70.46 |
01/31/10
|
|
75.67
|
|
103.80
|
|
115.09 |
23
|
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ITEM 6. |
|
SELECTED FINANCIAL DATA |
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Years Ended January 31,(1) |
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2010 |
|
|
2009(3) |
|
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2008 |
|
|
2007 |
|
|
2006(2) |
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(in thousands, except per share data) |
|
STATEMENTS OF OPERATIONS DATA: |
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|
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|
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Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License fees |
|
$ |
28,452 |
|
|
$ |
46,673 |
|
|
$ |
61,491 |
|
|
$ |
54,425 |
|
|
$ |
57,926 |
|
Maintenance and other |
|
|
131,142 |
|
|
|
133,080 |
|
|
|
128,183 |
|
|
|
122,740 |
|
|
|
117,139 |
|
Services |
|
|
55,637 |
|
|
|
82,990 |
|
|
|
73,073 |
|
|
|
58,422 |
|
|
|
50,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
215,231 |
|
|
|
262,743 |
|
|
|
262,747 |
|
|
|
235,587 |
|
|
|
225,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
2,871 |
|
|
|
(23,863 |
) |
|
|
5,588 |
|
|
|
8,137 |
|
|
|
15,625 |
|
Net income (loss) |
|
$ |
1,349 |
|
|
$ |
(23,720 |
) |
|
$ |
5,416 |
|
|
$ |
7,276 |
|
|
$ |
20,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share |
|
$ |
0.04 |
|
|
$ |
(0.77 |
) |
|
$ |
0.17 |
|
|
$ |
0.22 |
|
|
$ |
0.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share |
|
$ |
0.04 |
|
|
$ |
(0.77 |
) |
|
$ |
0.17 |
|
|
$ |
0.22 |
|
|
$ |
0.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share |
|
$ |
0.10 |
|
|
$ |
0.10 |
|
|
$ |
0.10 |
|
|
$ |
0.10 |
|
|
$ |
0.10 |
|
BALANCE SHEET DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents |
|
|
44,678 |
|
|
|
31,467 |
|
|
|
45,613 |
|
|
|
54,192 |
|
|
|
59,971 |
|
Working capital (deficit) |
|
|
4,178 |
|
|
|
(3,648 |
) |
|
|
8,846 |
|
|
|
14,762 |
|
|
|
20,694 |
|
Total assets |
|
|
191,174 |
|
|
|
193,745 |
|
|
|
235,893 |
|
|
|
227,132 |
|
|
|
207,331 |
|
Current portion of long-term debt |
|
|
285 |
|
|
|
266 |
|
|
|
274 |
|
|
|
272 |
|
|
|
243 |
|
Long-term debt |
|
|
16,443 |
|
|
|
16,717 |
|
|
|
16,998 |
|
|
|
17,271 |
|
|
|
17,546 |
|
Total stockholders equity |
|
|
49,551 |
|
|
|
47,471 |
|
|
|
72,595 |
|
|
|
76,572 |
|
|
|
72,159 |
|
|
|
|
(1) |
|
Historical results of operations are not necessarily indicative of future results. Refer to
Item 1A entitled Risk Factors for discussion of factors that may impact future results. |
|
(2) |
|
Fiscal year 2006 includes a tax benefit from the reversals of valuation allowances and
contingency reserves of $11.5 million. |
|
(3) |
|
Fiscal year 2009 includes a goodwill impairment charge of $14.4 million. |
24
|
|
|
ITEM 7. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
FORWARD LOOKING STATEMENTS
In addition to historical information, this Annual Report on Form 10-K contains
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Any statements contained herein that are not
statements of historical fact should be construed as forward looking statements, including
statements that are preceded or accompanied by such words as may, believe, could,
anticipate, would, might, plan, expect and words of similar meaning or the negative of
these terms or other comparable terminology. Forward-looking statements are based on current
expectations and assumptions that are subject to risks and uncertainties that could cause actual
results to differ materially. Factors that might cause such a difference include, but are not
limited to, those discussed in Item 1A entitled Risk Factors. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect managements opinions only as of
the date of this Annual Report on Form 10-K. We undertake no obligation to revise or update or
publicly release the results of any revision or update to these forward-looking statements. Readers
should carefully review the risk factors and other information described in this Annual Report on
Form 10-K and the other documents we file from time to time with the Securities and Exchange
Commission, including the Quarterly Reports on Form 10-Q to be filed by QAD in fiscal 2011.
INTRODUCTION
The following discussion should be read in conjunction with our Consolidated Financial
Statements and Notes to Consolidated Financial Statements included in Item 15 of this Annual Report
on Form 10-K.
OVERVIEW
QAD is a global provider of enterprise software applications, and related services and
support. We are principally focused on addressing the needs of global manufacturing companies. Our
solutions are configured to address the requirements of the following specific manufacturing
industries: automotive, consumer products, food and beverage, high technology, industrial products
and life sciences. QAD software is used by over 2,500 manufacturing companies around the world and
QAD employs approximately 1,350 people globally.
QADs main Enterprise Resource Planning (ERP) product suite is called QAD Enterprise
Applications, formerly marketed as MFG/PRO. The QAD Enterprise Applications suite provides a robust
set of capabilities designed to support the core business of our
customers around the world and enable most
common business processes.
Total revenue was $215.2 million in fiscal 2010 down from $262.7 million in fiscal 2009. We
experienced decreases of 39% in license revenue and 33% in services revenue, while maintenance and
other revenue remained relatively flat. Cost of revenue as a percentage of total revenue was 43%
for fiscal 2010, compared to 46% for the prior fiscal year, down primarily due to changes in
revenue mix.
Cash flows from operations were $17.7 million for fiscal 2010, compared to $7.3 million in
fiscal 2009. The increase in cash flows from operations was primarily due to the change in net
income from a net loss of $23.7 million, including a $14.4 million non-cash goodwill impairment
charge, in fiscal 2009 to net income of $1.3 million in fiscal 2010. The improvement period over
period was primarily driven by cost reduction initiatives. In addition, operating cash flow
improved due to the positive effect of the change in deferred revenue. These increases were
partially offset by higher payments for severance.
Global economic conditions deteriorated significantly during the second half of fiscal 2009
and continued to be unfavorable throughout fiscal 2010. We have seen demand for our products and
services decline in each of our geographic regions and in the manufacturing industries we serve,
most notably in automotive. In response to the difficult economic environment, we initiated many
expense reduction initiatives, including reductions in headcount of approximately 15%. Our strategy
remains focused on the development and delivery of best-in-class software applications for the
manufacturing industry in our six key industry segments and we are continuing to monitor the
economic and business environment throughout fiscal 2011.
25
CRITICAL ACCOUNTING POLICIES
We consider certain accounting policies related to revenue recognition, accounts receivable
allowances, long-lived assets, goodwill, capitalized software development costs, valuation of
deferred tax assets and tax contingency reserves and stock-based compensation to be critical
policies due to the significance of these items to our operating results and the estimation
processes and management judgment involved in each. Historically, estimates described in our
critical accounting policies that have required significant judgment and estimation on the part of
management have been reasonably accurate.
Revenue Recognition. We derive our revenues from the sale or the license of our software
products and from support services, subscriptions, consulting, development, training, and other
professional services. The majority of our software is sold or licensed in multiple-element
arrangements that include support services and often consulting services or other elements. We
therefore license our software generally in multiple-element arrangements. As a result, we exercise
judgment and use estimates in connection with the amount and timing of revenue recognition. For
software license arrangements that do not require significant modification or customization of the
underlying software, we recognize revenue when persuasive evidence of an arrangement exists,
delivery has occurred, the fee is fixed or determinable, and collectibility is probable. A majority
of our license revenue is recognized in this manner. Revenue is presented net of sales, use and
value-added taxes collected from our customers.
Our typical payment terms vary by region. Occasionally, payment terms of up to one year may be
granted for software license fees to customers with an established history of collections without
concessions. Should we grant payment terms greater than one year or terms that are not in
accordance with our established history for similar arrangements, we would recognize revenue as
payments become due assuming all other criteria for software revenue recognition requirements have
been met.
Provided all other revenue recognition criteria have been met, we recognize license revenue on
delivery using the residual method when vendor-specific objective
evidence of fair value (VSOE) exists for all of the undelivered elements (for example, support services, consulting, or other
services) in the arrangement. We allocate revenue to each undelivered element based on VSOE, which
is the price charged when that element is sold separately or, for elements not yet sold separately,
the price established by our management if it is probable that the price will not change before the
element is sold separately. We allocate revenue to undelivered support services based on rates
charged to renew the support services annually after an initial period. We allocate revenue to
undelivered consulting services based on time and materials rates of stand-alone services
engagements by role and by country. We review our VSOE at least annually. If we were to be unable
to establish or maintain VSOE for one or more undelivered elements within a multiple-element
arrangement, it could adversely impact our revenues, results of operations and financial position
because we may have to defer all or a portion of the revenue or recognize revenue ratably from
multiple-element arrangements.
Multiple element arrangements for which VSOE does not exist for all undelivered elements
typically occur when we introduce a new product or product bundles for which we have not
established VSOE for support services or consulting or other services under our VSOE policy. In
these instances, revenue is deferred and recognized ratably over the longer of the support services
(maintenance period) or consulting services engagement, assuming there are no specified future
deliverables. In the instances in which it has been determined that revenue on these bundled
arrangements will be recognized ratably due to lack of VSOE, at the time of recognition, we
allocate revenue from these bundled arrangement fees to all of the non-license revenue categories
based on VSOE of similar support services or consulting services. The remaining arrangement fees,
if any, are then allocated to software license fee revenue. The associated costs primarily consist
of payroll and related costs to perform both the consulting services and provide support services
and royalty expense related to the license and maintenance revenue. These costs are included in
cost of maintenance, services and other and cost of license based on the allocated revenue
categories.
Revenue from support services and product updates, referred to as maintenance revenue, is
recognized ratably over the term of the maintenance period, which in most instances is one year.
Software license updates provide customers with rights to unspecified software product upgrades,
maintenance releases and patches released during the term of the support period on a when-and-if
available basis. Product support includes Internet access to technical content, as well as Internet
and telephone access to technical support personnel. A majority of our customers purchase both
product support and license updates when they acquire new software licenses. In addition, a
majority of our customers renew their product support services contracts
annually.
26
Revenues from consulting services are typically comprised of implementation, development,
training or other consulting services. Consulting services are generally sold on a
time-and-materials basis and can include services ranging from software installation to data
conversion and building non-complex interfaces to allow the software to operate in integrated
environments. Consulting engagements can range anywhere from one day to several months and are
based strictly on the customers requirements and complexities and are independent of the
functionality of our software. Our software, as delivered, can generally be used by the customer
for the customers purpose upon installation. Further, implementation and integration services
provided are generally not essential to the functionality of the software, as delivered, and do not
result in any material changes to the underlying software code. On occasion, we enter into fixed
fee arrangements for arrangements in which customer payments are tied to achievement of specific
milestones. In fixed fee arrangements, revenue is recognized as services are performed as measured
by hours incurred to date, as compared to total estimated hours to be incurred to complete the
work. In milestone achievement arrangements, we recognize revenue as the respective milestones are
achieved.
Revenue from our subscription product offerings, including our On Demand products, is
recognized ratably over the contract period when the customer does not have the right to take
possession of the software. For subscription arrangements where the customer has the right and
ability to take possession of the software, revenue is recognized using the residual method.
Although infrequent, when an arrangement does not qualify for separate accounting of the
software license and consulting transactions, the software license revenue is recognized together
with the consulting services. Arrangements that do not qualify for separate accounting of the
software license fee and consulting services typically occur when we are requested to customize
software or where we view the installation of our software as high risk in the customers
environment. This requires us to make estimates about the total cost to complete the project and
the stage of completion. The assumptions, estimates, and uncertainties inherent in determining the
stage of completion affect the timing and amounts of revenues and expenses reported. Changes in
estimates of progress toward completion and of contract revenues and contract costs are accounted
for using the cumulative catch up approach. In these arrangements, we do not have a sufficient
basis to estimate the costs of providing support services. As a result, revenue is typically
recognized on a percent completion basis up to the amount of costs incurred (zero
margin). Once the consulting services are complete and support services are the only
undelivered item, the remaining revenue is recognized evenly over the remaining support period. If
we do not have a sufficient basis to measure the progress of completion or to estimate the total
contract revenues and costs, revenue is recognized when the project is complete and, if applicable,
final acceptance is received from the customer. We allocate these bundled arrangement fees to
support services and consulting services revenues based on VSOE. The remaining arrangement fees are
then allocated to software license fee revenues. The associated costs primarily consist of payroll
and related costs to perform the consulting and support services and royalty expense and are included in cost of license,
maintenance, services and other based on the allocation of the related revenues.
We execute arrangements through indirect sales channels via sales agents and distributors in
which the indirect sales channels are authorized to market our software products to end users. In
arrangements with sales agents, revenue is recognized on a sell-through basis once an order is
received from the end user, collectibility from the end user is probable, a signed license
agreement from the end user has been received by us, delivery has been made to the end user and all
other revenue recognition criteria have been satisfied. Sales agents are compensated on a
commission basis. Distributor arrangements are those in which the resellers are authorized to
market and distribute our software products to end users in specified territories and the
distributor bears the risk of collection from the end user customer. We recognize revenue from
transactions with distributors when the distributor submits a written purchase commitment,
collectibility from the distributor is probable, a signed license agreement is received from the
distributor and delivery has occurred to the distributor, provided that all other revenue
recognition criteria have been satisfied. Revenue for distributor transactions is recorded on a net
basis (the amount actually received by us from the distributor). We do not offer rights of return,
product rotation or price protection to any of our distributors.
27
Accounts Receivable Allowances. We review the collectibility of our accounts receivable each
period by analyzing balances based on age and record specific allowances for any balances that we
determine may not be fully collectible due to inability of the customers to pay. We also provide an
additional reserve based on historical data including analysis of write-offs and other known
factors. The allowance for sales adjustments primarily relates to reserves required to adjust
revenue to the amount that will actually be realized. Provisions to the allowance for doubtful
accounts are included in bad debt expense in general and administrative expense and provisions for
sales adjustments are recorded against revenue. The economic downturn has affected our customer
base, as it is focused in manufacturing and, in particular, the automotive supplier industry.
Therefore, we are closely monitoring our receivable balances. Significant judgment is required in
adjusting our receivables to amounts we believe are realizable, especially when a customer is
experiencing financial difficulty or is in bankruptcy. Although we use the best information
available in making our estimates, we may incur additional bad debt expense in future periods which
could have a material effect on earnings in any given quarter should additional allowances for
doubtful accounts be necessary.
Long-Lived Assets. Our long-lived assets generally consist of property and equipment and
intangible assets, other than goodwill. Other intangible assets arise from business combinations
and generally consist of customer relationships, restrictive covenants related to employment
agreements, trade names and intellectual property that are amortized, on a straight-line basis,
generally over periods of up to five years. Finite-lived intangible assets are required to be
amortized over their useful lives and are subject to impairment evaluation. We assess the
realizability of our long-lived assets whenever events or changes in circumstances indicate the
carrying values of such assets may not be recoverable. We consider the following factors important
in determining when to perform an impairment review: significant under-performance of a product
relative to budget; shifts in business strategies which affect the continued uses of the assets;
significant negative industry or economic trends; and the results of past impairment reviews.
In assessing the recoverability of these long-lived assets, we first compare undiscounted cash
flows expected to be generated by that asset or asset group to its carrying value. If the carrying
value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis,
impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value
of the assets or asset groups is determined through various valuation techniques including
discounted cash flow models, quoted market values and independent third party appraisals, as
considered necessary. In addition to our recoverability assessments, we routinely review the
remaining estimated useful lives of our long-lived assets. Any reduction in the useful life
assumption will result in increased depreciation and amortization expense in the quarter when such
determinations are made, as well as in subsequent quarters.
We will continue to evaluate the values of our long-lived assets in accordance with applicable
accounting rules. As changes in business conditions and our assumptions occur, we may be required
to record impairment charges.
Goodwill. We test goodwill for impairment annually in our fourth fiscal quarter or sooner
should events or changes in circumstances indicate potential impairment.
We review the carrying value of goodwill using the methodology prescribed in FASB Accounting
Standards Codification (ASC) 350 IntangiblesGoodwill and Other. ASC 350 requires that we not
amortize goodwill, but instead subject it to impairment tests on at least an annual basis and
whenever circumstances suggest that it may be impaired. These impairment tests are also dependent
on managements forecasts, which are subject to change. A change in our forecasts may result in
impairment charges. We perform a two-step impairment test. Under the first step of the goodwill
impairment test, we are required to compare the fair value of a reporting unit with its carrying
amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount,
goodwill of the reporting unit is not considered impaired and we do not perform the second step. If
the results of the first step impairment test indicate that the fair value of a reporting unit does
not exceed its carrying amount, then the second step of the goodwill impairment test is required.
The second step of the goodwill impairment test compares the implied fair value of the reporting
unit goodwill with the carrying amount of that goodwill. The impairment loss is measured by the
excess of the carrying amount of the reporting unit goodwill over the implied fair value of that
goodwill.
Effective February 1, 2009, we determined that we have one reporting unit. Management
evaluates the Company as a single reporting unit for business and operating purposes as almost all
of QADs revenue streams are generated by the same underlying technology whether acquired,
purchased or developed. In addition, the majority of QADs costs are, by their nature, shared
costs that are not specifically identifiable to a geography or product line but relate to almost
all products. As a result, there is a high degree of interdependency among QADs revenues and
cash flows for levels below the consolidated entity and identifiable cash flows for a reporting
unit separate from the consolidated entity are not meaningful. Therefore, our impairment test
considered the consolidated entity as a single reporting unit.
28
Prior to February 1, 2009, we allocated goodwill to four geographic reporting units.
Accordingly, goodwill impairment tests were conducted annually for each of the four reporting
units. Prior to combining reporting units on February 1, 2009, we performed an impairment test on
each of the three reporting units that had goodwill remaining and determined there was no
impairment to any reporting unit. This change in reporting unit structure was brought about by an
internal reorganization of QADs sales operations and de-emphasis on regional results as a result
of the importance of the global nature of our customer base. An example of our internal reorganization is the creation of the strategic
accounts group, which is accountable for sales to QADs multi-national customers, irrespective of
geography, who generate a large portion of our revenue. The purpose of the strategic accounts
group within the sales organization is to provide additional expertise and devote additional time
to global customer accounts with revenues spanning across all
regions. In order to serve this base of global
customers, we must maintain a presence in certain foreign locations where it may not be profitable
to do so and sales and support efforts are devoted to these customers irrespective of where the
end-users are located.
Capitalized Software Development Costs. We capitalize software development costs incurred
once technological feasibility has been achieved in the form of a working model. These costs are
primarily related to the localization and translation of our products. A working model is defined
as an operative version of the computer software product that is completed in the same software
language as the product to be ultimately marketed, performs all the major functions planned for the
product and is ready for initial customer testing. We also capitalize software purchased from third
parties or through business combinations as acquired software technology if such software has
reached technological feasibility. Capitalized software costs are amortized on a product-by-product
basis and charged to Cost of license fees. Capitalized software costs are amortized on a
straight-line basis over the products estimated useful life, which is typically three years. We
periodically compare the unamortized capitalized software costs to the estimated net realizable
value of the associated product. The amount by which the unamortized capitalized software costs of
a particular software product exceeds the estimated net realizable value of that asset is reported
as a charge to the statement of operations. This review requires management judgment regarding
future cash flows. If these estimates or their related assumptions require updating in the future,
we may incur substantial losses due to the write-down or write-off of these assets.
Valuation of Deferred Tax Assets and Tax Contingency Reserves. The carrying value of our
deferred tax assets reflects an amount that is more likely than not to be realized. At January 31,
2010, QAD had $29.8 million of deferred tax assets, net of valuation allowances, consisting of
$39.4 million of gross deferred tax assets offset by valuation allowances of $9.6 million. In
assessing the likelihood of realizing tax benefits associated with deferred tax assets and the need
for a valuation allowance, we consider the weight of all available evidence, both positive and
negative, including expected future taxable income and tax planning strategies that are both
prudent and feasible. There was a net decrease of valuation allowances recorded in fiscal 2010 of
$1.0 million. Should we determine that we would not be able to realize all or part of the net
deferred tax asset in the future, an adjustment to deferred tax assets would increase tax expense
in the period such determination was made.
We recognize a tax position when we determine that it is more likely than not that the
position will be sustained upon examination, including resolution of any related appeals or
litigation processes, based on the technical merits of the position. For tax positions that are
more likely than not to be sustained, we measure the tax position as the largest amount of benefit
that has a greater than 50% likelihood of being realized when it is ultimately settled. We reflect
interest and penalties related to income tax liabilities as income tax expense.
We have reserves for taxes to address potential exposures involving tax positions that could
be challenged by taxing authorities, even though we believe that the positions taken are
appropriate. The tax reserves are reviewed as circumstances warrant and adjusted as events occur
that affect our potential liability for additional taxes. We are subject to income taxes in the
U.S. and in numerous foreign jurisdictions, and in the ordinary course of business, there are many
transactions and calculations where the ultimate tax determination is uncertain.
Stock-Based Compensation. Share-based payment transactions with employees are accounted for
using a fair-value-based method and expensed ratably over the vesting period of the stock
instrument, in accordance with the provisions of ASC 718 Compensation Stock Compensation.
29
Stock-based compensation expense is based on the fair values of all stock-based awards as of
the grant date using the Black-Scholes valuation model. Determining the fair value of stock-based
awards at the grant date requires judgment, including estimating the expected life of the award,
the percentage of awards that will be forfeited and other inputs. If actual forfeitures differ
significantly from the estimates, stock-based compensation expense and our results of operations
could be materially impacted.
RECENTLY ISSUED ACCOUNTING STANDARDS
For a full description of recent accounting pronouncements, including the expected dates of
adoption and estimated effects on results of operations and financial condition, see note 1
Summary of Business and Significant Accounting Policies within the Notes to Consolidated
Financial Statements included in Item 15 of this Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Revenue
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Change compared |
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Change compared |
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Year Ended |
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|
to prior period |
|
|
Year Ended |
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|
to prior period |
|
|
Year Ended |
|
(in thousands) |
|
January 31, 2010 |
|
|
$ |
|
|
% |
|
|
January 31, 2009 |
|
|
$ |
|
|
% |
|
|
January 31, 2008 |
|
|
|
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|
|
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Revenue |
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|
|
|
|
|
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|
License fees |
|
$ |
28,452 |
|
|
$ |
(18,221 |
) |
|
|
(39 |
)% |
|
$ |
46,673 |
|
|
$ |
(14,818 |
) |
|
|
(24 |
)% |
|
$ |
61,491 |
|
Percentage of total revenue |
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
18 |
% |
|
|
|
|
|
|
|
|
|
|
23 |
% |
Maintenance and other |
|
|
131,142 |
|
|
|
(1,938 |
) |
|
|
(1 |
)% |
|
|
133,080 |
|
|
|
4,897 |
|
|
|
4 |
% |
|
|
128,183 |
|
Percentage of total revenue |
|
|
61 |
% |
|
|
|
|
|
|
|
|
|
|
51 |
% |
|
|
|
|
|
|
|
|
|
|
49 |
% |
Services |
|
|
55,637 |
|
|
|
(27,353 |
) |
|
|
(33 |
)% |
|
|
82,990 |
|
|
|
9,917 |
|
|
|
14 |
% |
|
|
73,073 |
|
Percentage of total revenue |
|
|
26 |
% |
|
|
|
|
|
|
|
|
|
|
31 |
% |
|
|
|
|
|
|
|
|
|
|
28 |
% |
|
|
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|
|
|
|
|
|
|
|
|
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|
Total revenue |
|
$ |
215,231 |
|
|
$ |
(47,512 |
) |
|
|
(18 |
)% |
|
$ |
262,743 |
|
|
$ |
(4 |
) |
|
|
0 |
% |
|
$ |
262,747 |
|
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|
Comparison of fiscal 2010 revenue to fiscal 2009
Total revenue for fiscal 2010 was $215.2 million, a decrease of $47.5 million, or 18%, from
$262.7 million in fiscal 2009. Our customers are widely dispersed and no single customer accounted
for more than 10% of total revenue in any of the last three fiscal years. Holding foreign currency
exchange rates constant to those prevailing in fiscal 2009, total revenue for the current year
would have been approximately $219.9 million, or $42.8 million lower when compared to the same
period last year. When comparing categories within total revenue at constant rates, our current
results included a decrease in the license and services revenue categories partially offset by an
increase in the maintenance and other revenue category. Revenue outside the North America region as
a percentage of total revenue was relatively consistent at 57% and 56% for fiscal 2010 and fiscal
2009, respectively. Total revenue decreased across all our geographic regions in fiscal 2010
compared to fiscal 2009. Our products are sold to manufacturing companies that operate mainly in
the following six industries: automotive, consumer products, food and beverage, high technology,
industrial products and life sciences. Given the similarities between food and beverage and
consumer products as well as between high technology and industrial products, we aggregate them for
management review. Our fiscal 2010 revenue by industry was approximately 26% in automotive, 24% in
consumer products and food and beverage, 37% in high technology and industrial products and 13% in
life sciences. This compares to revenue by industry in fiscal 2009 of 31% in automotive, 23% in
consumer products and food and beverage, 35% in high technology and industrial products and 11% in
life sciences. The decrease in the automotive vertical can be attributed primarily to a decline in
revenue from the U.S. automotive suppliers during fiscal 2010.
30
License revenue was $28.5 million for fiscal 2010, down $18.2 million, or 39%, from $46.7
million in fiscal 2009. We believe significant declines in demand for our customers products
generally resulted in a preservation of capital as well as delays in license purchasing decisions
by our customers. This was especially true in the automotive sector, which represents approximately
a quarter of our business. Holding foreign currency exchange rates constant to those prevailing in
fiscal 2009, license revenue for fiscal 2010 would have been approximately $28.7 million,
representing an $18.0 million, or 39%, decrease from the same period last year. We experienced
decreases in license revenue in all of our geographic regions. One of the metrics that management
uses to measure license revenue performance is the number of customers that have placed sizable
license orders in the period. During fiscal 2010, 13 customers placed license orders totaling more
than $0.3 million, two of which exceeded $1.0 million. In comparison, during fiscal 2009, 33
customers placed license orders totaling more than $0.3 million, five of which exceeded $1.0
million.
Products are generally shipped as orders are received or within a short period thereafter and,
accordingly, we have historically operated with little or no license backlog. Because of the
generally short cycle between order and shipment, we believe that our backlog as of any particular
date is not significant or meaningful. Our total short-term deferred revenue as of January 31, 2010
was $85.7 million, of which $76.3 million related to deferred maintenance and will be recognized
over the period of the maintenance support. Of the remaining short-term deferred revenue balance as
of January 31, 2010, $3.1 million was related to deferred research and development funding, $2.9
million was related to deferred licenses, $1.8 million was related to deferred services and $1.5
million was related to deferred subscriptions. All of these balances, with the exception of
deferred subscriptions, relate to products already shipped or services already provided but were
deferred primarily due to software revenue recognition rules and will be recognized within the next
twelve months. Deferred subscription primarily relates to hosting and On Demand services we will
provide over periods up to the next twelve months.
Maintenance and other revenue was $131.1 million for fiscal 2010, representing a decrease of
$1.9 million, or 1%, from $133.1 million in the same period in fiscal 2009. Holding foreign
currency exchange rates constant to those prevailing in fiscal 2009, maintenance and other revenue
for fiscal 2010 would have been approximately $133.4 million, representing an increase of $0.3
million, or less than 1%, from the same period last year. When comparing fiscal 2010 to fiscal
2009, maintenance and other revenue decreased across all our geographic regions except for the Asia
Pacific region. We track our rate of contract renewals by determining the number of customer sites
with active contracts as of the end of the previous reporting period and compare this to the number
of customers that renewed, or are in the process of renewing, their maintenance contract as of the
current period end. Our maintenance contract renewal rate has remained consistent, in excess of 90%
for fiscal years 2010, 2009 and 2008.
Services revenue was $55.6 million for fiscal 2010, representing a decrease of $27.4 million,
or 33%, when compared to services revenue of $83.0 million earned in the same period last year.
Holding exchange rates constant to those prevailing during the prior year period, services revenue
for fiscal 2010 would have been approximately $57.8 million, reflecting a $25.2 million, or 30%,
decrease from the same period last year. When comparing fiscal 2010 to fiscal 2009, services
revenue decreased across all our geographic regions. The decrease in services revenue period over
period was primarily attributed to a large engagement in the automotive sector that was scaled back
in the fourth quarter of fiscal 2009 as well as engagements in which we were recognizing a lower
amount of services revenue per customer per quarter, which we believe was a result of lower license
revenue over the recent quarters and customer decisions to extend or delay their implementations,
upgrades or other ongoing services projects.
Comparison of fiscal 2009 revenue to fiscal 2008
Total revenue for fiscal 2009 was $262.7 million, representing no change in revenue from
$262.7 million in fiscal 2008. Holding foreign currency exchange rates constant to those prevailing
in fiscal 2008, total revenue for fiscal 2009 would have been approximately $262.3 million, or $0.4
million lower when compared to the same period in the preceding year. When comparing categories
within total revenue at constant rates, our fiscal 2009 results included a decrease in the license
revenue category partially offset by an increase in revenue in the services and maintenance and
other revenue categories. Revenue outside the North America region as a percentage of total revenue
was consistent at 56% for both fiscal 2009 and fiscal 2008. Revenue increased in the Europe, Middle East and
Africa (EMEA), Asia Pacific and Latin America geographic regions during fiscal 2009 compared to
fiscal 2008 while total revenue attributable to the North America region decreased during fiscal
2009 compared to fiscal 2008. Our fiscal 2009 revenue by industry was approximately 31% in
automotive, 23% in consumer products and food and beverage, 35% in high technology and industrial
products and 11% in life sciences. These percentages were fairly consistent with fiscal 2008.
Although revenue generated from the automotive sector was consistent year over year, there was a
decline in revenue in the fourth quarter of fiscal 2009, compared to the fourth quarter fiscal 2008
primarily due to a decline in revenue from the U.S. automotive suppliers.
31
License revenue was $46.7 million for fiscal 2009, down $14.8 million, or 24%, from $61.5
million in fiscal 2008. We believe significant declines in demand for our customers products
generally resulted in a preservation of capital as well as delays in license purchasing decisions
by our customers. This was especially true in the automotive sector,
which represented approximately
a third of our business. Holding foreign currency exchange rates constant to those prevailing in
fiscal 2008, license revenue for fiscal 2009 would have been approximately $47.1 million,
representing a $14.4 million, or 23%, decrease from the same period in fiscal 2008. We experienced
decreases in license revenue in all of our geographic regions, except for our EMEA region. One of
the metrics that management uses to measure license revenue performance is the number of customers
that have placed sizable license orders in the period. During fiscal 2009, 33 customers placed
license orders totaling more than $0.3 million, five of which exceeded $1.0 million. In comparison,
during fiscal 2008, 46 customers placed license orders totaling more than $0.3 million, nine of
which exceeded $1.0 million.
Maintenance and other revenue was $133.1 million for fiscal 2009, representing an increase of
$4.9 million, or 4%, from $128.2 million over the same period in fiscal 2008. When we hold exchange
rates constant to those prevailing in the same period of fiscal 2008, maintenance and other revenue
for fiscal 2009 would have been unchanged at $133.1 million. Maintenance and other revenue
increased across all our geographic regions except in the EMEA region, which experienced a decrease
in fiscal 2009 compared to fiscal 2008. We track our rate of contract renewals by determining the
number of customer sites with active contracts as of the end of the previous reporting period and
compare this to the number of customers that renewed, or are in the process of renewing, their
maintenance contract as of the current period end. Our maintenance contract renewal rate has
remained consistent, in excess of 90% for fiscal years 2009 and 2008.
Services revenue was $83.0 million for fiscal 2009, representing an increase of $9.9 million,
or 14%, when compared to services revenue of $73.1 million earned in the same period in fiscal
2008. Holding exchange rates constant to those prevailing during the prior year period, services
revenue for fiscal 2009 would have been approximately $82.1 million, reflecting a $9.0 million, or
12%, increase from the same period in the preceding year. When comparing fiscal 2009 to fiscal
2008, services revenue increased across all our geographic regions. The increase in services
revenue period over period was primarily due to global services implementations related to a small
number of large, multi-national customers. During the fourth quarter of fiscal 2009, a large
services engagement in the automotive sector was scaled back significantly impacting our fourth
quarter services results.
Comparison of costs and expensesfiscal 2010, 2009 and 2008
Restructuring
As a result of the global economic downturn, which began in the second half of fiscal 2009 and
has continued into fiscal 2010, QAD has experienced a significant decline in product and services
sales. In response to the difficult economic environment, we took steps to reduce our headcount and
lower expenses beginning in the fourth quarter of fiscal 2009 and again in the second and third
quarters of fiscal 2010. Related to these restructuring initiatives, we have incurred costs related
to employee severance and benefits of $6.5 million and a total of approximately 260 full-time
positions have been eliminated, which was approximately 15% of the workforce. Severance charges of
$3.4 million were incurred in the fourth quarter of fiscal 2009 and we have incurred an additional
$3.1 million in severance charges during fiscal 2010.
We believe the restructuring activities are substantially complete but will continue to
monitor the profitability of our operations. If revenue should continue to decline significantly,
we will continue to further reduce operating expenses to align them with economic conditions, and
possibly could engage in further restructuring. In taking these actions, we may incur additional
costs which could negatively impact net income and cash flows from operating activities. Below is a
detailed description of the restructuring charges and accruals by plan.
32
Restructuring charges included in our Consolidated Statements of Operations for the fiscal
years ended January 31, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended January 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
Cost of maintenance, services and other revenue |
|
$ |
1,054 |
|
|
$ |
854 |
|
Sales and marketing |
|
|
1,113 |
|
|
|
1,607 |
|
Research and development |
|
|
633 |
|
|
|
590 |
|
General and administrative |
|
|
316 |
|
|
|
300 |
|
|
|
|
|
|
|
|
Total restructuring charges |
|
$ |
3,116 |
|
|
$ |
3,351 |
|
|
|
|
|
|
|
|
Fourth Quarter Fiscal 2009 Restructuring Plan
In the fourth quarter of fiscal 2009, we initiated a restructuring program in order to reduce
operating costs. This program reduced the number of employees by approximately 145 full-time
positions globally. In connection with this restructuring plan, we recorded restructuring charges
totaling $3.4 million related to one-time termination benefits for the elimination of approximately
110 of these full-time positions during the fourth quarter of fiscal 2009. During fiscal 2010, an
additional $0.8 million of severance expense was recognized related to one-time termination
benefits for the elimination of the remaining 15 employees identified in Q4 fiscal 2009 and an
additional 20 employees identified in Q1 fiscal 2010. Related to this restructuring plan, we paid
$0.5 million in the fourth quarter of fiscal 2009 and $3.5 million in fiscal 2010. During fiscal
2010, we adjusted the original fourth quarter fiscal 2009 restructuring accrual by $0.1 million. As
of January 31, 2010, there was approximately $0.1 million accrued related to one employee whose
severance agreement was settled in February 2010. We expect to make this remaining payment in the
first quarter of fiscal 2011.
Second Quarter Fiscal 2010 Restructuring Plan
In May 2009, we took further cost cutting actions which resulted in additional severance
expense of approximately $1.5 million in the second quarter of fiscal 2010. The number of employees
was reduced by approximately 80 full-time positions. During fiscal 2010, a total of $1.5 million
was paid related to the plan. As of January 31, 2010, the plan was complete.
Third Quarter Fiscal 2010 Restructuring Plan
During the third quarter of fiscal 2010, we reduced further the number of employees by
approximately 35 full-time positions and recorded $0.9 million restructuring charges related to
severance and related expenses. During fiscal 2010, we paid $0.9 million related to the third
quarter fiscal 2010 plan. As of January 31, 2010, the plan was substantially complete.
33
Restructuring Accruals
The activity in the restructuring accrual for fiscal years ended January 31, 2010 and 2009 is
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q4 Fiscal 2009 |
|
|
Q2 Fiscal 2010 |
|
|
Q3 Fiscal 2010 |
|
|
|
|
|
|
Restructuring |
|
|
Restructuring |
|
|
Restructuring |
|
|
|
|
|
|
Plan |
|
|
Plan |
|
|
Plan |
|
|
Total |
|
|
|
(in thousands) |
|
Balance as of January 31, 2008 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Employee severance pay and related expenses |
|
|
3,351 |
|
|
|
|
|
|
|
|
|
|
|
3,351 |
|
Cash paid |
|
|
(479 |
) |
|
|
|
|
|
|
|
|
|
|
(479 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 31, 2009 |
|
$ |
2,872 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,872 |
|
Employee severance pay and related expenses |
|
|
819 |
|
|
|
1,496 |
|
|
|
927 |
|
|
|
3,242 |
|
Cash paid |
|
|
(3,526 |
) |
|
|
(1,456 |
) |
|
|
(930 |
) |
|
|
(5,912 |
) |
(Reversal of) adjustment to previous charges |
|
|
(92 |
) |
|
|
(43 |
) |
|
|
9 |
|
|
|
(126 |
) |
Impact of foreign currency translation |
|
|
24 |
|
|
|
3 |
|
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 31, 2010 |
|
$ |
97 |
|
|
$ |
|
|
|
$ |
6 |
|
|
$ |
103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change compared |
|
|
|
|
|
|
Change compared |
|
|
|
|
|
|
Year Ended |
|
|
to prior period |
|
|
Year Ended |
|
|
to prior period |
|
|
Year Ended |
|
(in thousands) |
|
January 31, 2010 |
|
|
$ |
|
|
% |
|
|
January 31, 2009 |
|
|
$ |
|
|
% |
|
|
January 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of license fees |
|
$ |
6,941 |
|
|
$ |
2,811 |
|
|
|
29 |
% |
|
$ |
9,752 |
|
|
$ |
42 |
|
|
|
|
% |
|
$ |
9,794 |
|
Cost of maintenance, services and other |
|
|
84,686 |
|
|
|
27,133 |
|
|
|
24 |
% |
|
|
111,819 |
|
|
|
(10,747 |
) |
|
|
(11 |
)% |
|
|
101,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost revenue |
|
$ |
91,627 |
|
|
$ |
29,944 |
|
|
|
25 |
% |
|
$ |
121,571 |
|
|
$ |
(10,705 |
) |
|
|
(10 |
)% |
|
$ |
110,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of revenue |
|
|
43 |
% |
|
|
|
|
|
|
|
|
|
|
46 |
% |
|
|
|
|
|
|
|
|
|
|
42 |
% |
Cost
of license fees includes license royalties, amortization of software
technology and direct material. Cost
of maintenance, services and other includes personnel costs of fulfilling service contracts,
support contracts and order fulfillment, including stock based compensation for those employees,
third party contractor expense, travel expense for support and services
employees, direct material, professional fees, support royalties, and information technology and facilities allocated costs. Direct material charges include the cost of
hardware sold, costs associated with transferring our software to electronic media, printing of
user manuals and packaging materials, and shipping and handling costs.
Total cost of revenue (combined cost of license fees and cost of maintenance, services and
other revenue) was $91.6 million for fiscal 2010, $121.6 million for fiscal 2009 and $110.9 million
for fiscal 2008, and as a percentage of total revenue was 43% for fiscal 2010, 46% for fiscal 2009
and 42% for fiscal 2008. Holding exchange rates constant to those prevailing in fiscal 2009, total
cost of revenue for fiscal 2010 would have been approximately
$94.5 million and as a percentage of
total revenue would have been unchanged at 43%. Changes in the cost of revenue as a percentage of
total revenue were primarily due to lower services revenue in the
overall revenue mix. Services revenue has higher associated direct
costs, such as personnel costs, than the other revenue categories.
The non-currency related decrease in cost of revenue of $27.1 million in fiscal 2010 compared
to fiscal 2009 was primarily due to lower services personnel costs of $9.7 million primarily as a
result of lower headcount of approximately 120 people, lower third party contractor expense of $7.6
million and lower travel expense of $5.2 million. In addition, the cost of license fees decreased
by $2.7 million in fiscal 2010 compared to fiscal 2009 primarily as a result of lower royalty
expense due to lower license revenue.
34
Total cost of revenue increased $10.7 million in fiscal 2009 compared to fiscal 2008. Holding foreign
currency exchange rates constant to those prevailing in fiscal 2008, total cost of revenue for
fiscal 2009 would have been approximately $120.8 million and as a percentage of total revenue would
have been unchanged at 46%. Changes in the cost of revenue as a percentage of total revenue was due
to a decrease in license revenue and an increase in services revenue as a percentage of total
revenue as costs associated with generating services revenue are higher than the costs associated with generating license and
maintenance and other revenue.
The non-currency related increase in total cost of revenue of $9.9 million in fiscal 2009
compared to fiscal 2008 was primarily due to an increase in the cost of maintenance, services and
other revenue mainly related to increased services costs to generate additional services revenue.
Cost of revenue consisted of higher salaries and related expenses of $4.9 million primarily
attributable to increased headcount in services and higher third party contractor expense of $2.9
million. In addition, during the fourth quarter of fiscal 2009, we initiated a reduction in
workforce and as a result severance charges of $0.9 million were incurred primarily related to the
reduction of approximately 50 positions in services.
Sales and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change compared |
|
|
|
|
|
|
Change compared |
|
|
|
|
|
|
Year Ended |
|
|
to prior period |
|
|
Year Ended |
|
|
to prior period |
|
|
Year Ended |
|
(in thousands) |
|
January 31, 2010 |
|
|
$ |
|
|
% |
|
|
January 31, 2009 |
|
|
$ |
|
|
% |
|
|
January 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
$ |
51,979 |
|
|
$ |
21,046 |
|
|
|
29 |
% |
|
$ |
73,025 |
|
|
$ |
(2,009 |
) |
|
|
(3 |
)% |
|
$ |
71,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of revenue |
|
|
24 |
% |
|
|
|
|
|
|
|
|
|
|
28 |
% |
|
|
|
|
|
|
|
|
|
|
27 |
% |
Sales and marketing expense includes salaries, benefits, bonuses, stock-based
compensation and travel expense for our sales and marketing employees in addition to costs of programs aimed at
increasing revenue, such as trade shows, user group events, advertising and various sales and
promotional programs. Sales and marketing expense also includes personnel costs of order
processing, sales agent commissions and information technology and facilities allocated costs.
Sales and marketing expense was $52.0 million, $73.0 million and $71.0 million for fiscal
years 2010, 2009 and 2008, respectively. Holding foreign currency exchange rates constant to fiscal
2009, fiscal 2010 sales and marketing expense would have been approximately $53.5 million,
representing a decrease of $19.5 million, or 27%. The non-currency related decrease in sales and
marketing expense of $19.5 million in fiscal 2010 compared to fiscal 2009 was primarily due to
lower personnel costs of $10.7 million primarily related to lower salaries, bonuses and commissions
as a result of approximately 80 fewer employees, lower travel expense of $2.4 million, lower
marketing expense of $1.1 million, lower professional fees of $0.7 million, lower stock
compensation expense of $0.5 million, lower expenses associated with our internal sales workshop
event of $0.3 million and lower sales agent fees of $0.3 million. In addition, in fiscal 2010 we
did not hold our annual Explore customer event. This resulted in $1.7 million of cost savings when
compared to fiscal 2009.
Sales and marketing expense increased $2.0 million in
fiscal 2009 compared to fiscal 2008. Holding
foreign currency exchange rates constant to those in fiscal 2008, fiscal 2009 sales and marketing
expense would have been approximately $72.9 million, representing an increase of $1.9 million, or
3%. The non-currency related increase of $1.9 million in fiscal 2009 compared to fiscal 2008
primarily related to increases in salaries and related expenses of $3.4 million and severance
charges of $1.6 million related to the elimination of approximately 35 positions. In addition, in
November 2008, we hosted our EMEA Explore event which cost $0.4 million. In January 2009, we
cancelled our fiscal 2010 Explore event and incurred cancellation charges of $0.4 million. These
increases in expenses were offset by lower sales agent fees of $1.5 million and lower commissions
of $1.0 million primarily related to lower license revenue, in addition to lower travel of $0.5
million and lower marketing expense of $0.5 million.
35
Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change compared |
|
|
|
|
|
|
Change compared |
|
|
|
|
|
|
Year Ended |
|
|
to prior period |
|
|
Year Ended |
|
|
to prior period |
|
|
Year Ended |
|
(in thousands) |
|
January 31, 2010 |
|
|
$ |
|
|
% |
|
|
January 31, 2009 |
|
|
$ |
|
|
% |
|
|
January 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
$ |
37,303 |
|
|
$ |
5,804 |
|
|
|
13 |
% |
|
$ |
43,107 |
|
|
$ |
(2,038 |
) |
|
|
(5 |
)% |
|
$ |
41,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of revenue |
|
|
17 |
% |
|
|
|
|
|
|
|
|
|
|
17 |
% |
|
|
|
|
|
|
|
|
|
|
16 |
% |
Research and development expense is expensed as incurred and managed on a global basis.
It consists primarily of salaries, benefits, bonuses, stock-based compensation and travel expense
for research and development employees, professional services such as fees paid to software
development firms and independent contractors, and training for such personnel. Research and
development expense also includes information technology and facilities allocated costs, and is
reduced by income from joint development projects.
Research and development expense was $37.3 million, $43.1
million and $41.1 million for fiscal years 2010, 2009 and 2008, respectively. Holding foreign
currency exchange rates constant to fiscal 2009, fiscal 2010 research and development expense would
have been approximately $38.0 million, representing a decrease of $5.1 million, or 12%. The
non-currency related decrease in research and development expense of $5.1 million in fiscal 2010
compared to fiscal 2009 was primarily due to a decrease in personnel costs of $4.0 million related
to lower salaries and bonuses as a result of 25 fewer employees and lower travel expense of $0.9
million. These decreases in research and development expense were partially offset by lower joint
development income of $0.6 million.
Research and development expense increased $2.0 million in fiscal 2009 compared to fiscal 2008.
Holding foreign currency exchange rates constant to fiscal 2008, fiscal 2009 research and
development expense would have been approximately $42.6 million, representing an increase of $1.5
million, or 4%. The non-currency related increase of $1.5 million in fiscal 2009 compared to fiscal
2008 was primarily related to increases in salaries and related expenses of $1.5 million and
severance charges of $0.6 million related to a reduction in workforce initiated in the fourth
quarter of fiscal 2009. These increases in expenses were partially offset by a decrease in travel
expense of $0.6 million.
General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change compared |
|
|
|
|
|
|
Change compared |
|
|
|
|
|
|
Year Ended |
|
|
to prior period |
|
|
Year Ended |
|
|
to prior period |
|
|
Year Ended |
|
(in thousands) |
|
January 31, 2010 |
|
|
$ |
|
|
% |
|
|
January 31, 2009 |
|
|
$ |
|
|
% |
|
|
January 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
$ |
30,969 |
|
|
$ |
2,794 |
|
|
|
8 |
% |
|
$ |
33,763 |
|
|
$ |
(304 |
) |
|
|
(1 |
)% |
|
$ |
33,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of revenue |
|
|
14 |
% |
|
|
|
|
|
|
|
|
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
13 |
% |
General and administrative expense includes salaries, benefits, bonuses, stock-based
compensation and travel expense for our finance, human resources, legal and executive personnel, as
well as professional fees for accounting and legal services, bad debt expense and information
technology and facilities allocated costs.
General and administrative expense was $31.0 million, $33.8 million and $33.5 million for
fiscal years 2010, 2009 and 2008, respectively. Holding foreign currency exchange rates constant to
fiscal 2009, fiscal 2010 general and administrative expense would have been approximately $31.7
million, representing a decrease of $2.1 million, or 6%. The non-currency related decrease in
general and administrative expense of $2.1 million in fiscal 2010 compared to fiscal 2009 was
primarily due to lower personnel costs of $1.1 million as a result of lower headcount of
approximately 10 people and lower travel expense of $0.7 million. These decreases in general and
administrative expense were partially offset by higher bad debt expense of $0.6 million.
36
General and administrative expense increased $0.3 million in fiscal 2009 compared to fiscal 2008.
Holding foreign currency exchange rates constant to fiscal 2008, fiscal 2009 general and
administrative expense would have been approximately $33.9 million, representing an increase of
$0.4 million, or 1%. The non-currency related increase of $0.4 million in fiscal 2009 compared to
fiscal 2008 was primarily due to higher salaries and related expenses of $1.1 million and an
increase in bad debt expense of $1.2 million, partially offset by a decrease in professional fees
of $0.8 million related to tax consulting, lower bonuses of $0.4 million and lower stock
compensation expense of $0.4 million. During the fourth quarter of fiscal 2009, we initiated a
reduction in workforce and as a result severance charges of $0.3 million were incurred in the
general and administrative category.
Amortization of Intangibles from Acquisitions
Amortization of intangibles from acquisitions totaled $0.5 million, $0.7 million and $0.7
million for fiscal years 2010, 2009 and 2008, respectively. Amortization expense in each of the
three years was primarily due to the intangible assets acquired during fiscal 2007 from our
acquisitions of Precision, FBOS and Bisgen Ltd. (Bisgen). Amortization decreased in fiscal 2010
compared to fiscal 2009 due to the majority of our acquired intangible being fully amortized by the
end of the fiscal 2010 third quarter.
Goodwill Impairment Charge
We assess goodwill for impairment at least annually, or more frequently if indicators of
impairment exist. Our annual impairment review is conducted during the fourth quarter of each
fiscal year. No impairment was determined in fiscal 2010. As a result of our fiscal 2009 annual
impairment review, we recorded a goodwill impairment charge of $14.4 million, related to the former
EMEA reporting unit, due to declines in revenue and cash flow projections. No impairment was
determined in fiscal 2008.
Total Other (Income) Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change compared |
|
|
|
|
|
|
Change compared |
|
|
|
|
|
|
Year Ended |
|
|
to prior period |
|
|
Year Ended |
|
|
to prior period |
|
|
Year Ended |
|
(in thousands) |
|
January 31, 2010 |
|
|
$ |
|
|
% |
|
|
January 31, 2009 |
|
|
$ |
|
|
% |
|
|
January 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
(570 |
) |
|
$ |
(863 |
) |
|
|
(60 |
)% |
|
$ |
(1,433 |
) |
|
$ |
(810 |
) |
|
|
(36 |
)% |
|
$ |
(2,243 |
) |
Interest expense |
|
|
1,273 |
|
|
|
(28 |
) |
|
|
(2 |
)% |
|
|
1,245 |
|
|
|
117 |
|
|
|
9 |
% |
|
|
1,362 |
|
Other (income) expense, net |
|
|
(289 |
) |
|
|
45 |
|
|
|
18 |
% |
|
|
(244 |
) |
|
|
964 |
|
|
|
134 |
% |
|
|
720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (income) expense |
|
$ |
414 |
|
|
$ |
(846 |
) |
|
|
(196 |
)% |
|
$ |
(432 |
) |
|
$ |
271 |
|
|
|
168 |
% |
|
$ |
(161 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of revenue |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
% |
Total other (income) expense was $0.4 million, $(0.4) million and $(0.2) million for
fiscal years 2010, 2009 and 2008, respectively. The $0.8 million unfavorable change in fiscal 2010
compared to fiscal 2009 was primarily due to lower interest income due to both lower interest rates
and lower average balances in our investment accounts.
The $0.2 million favorable change in fiscal 2009 compared to fiscal 2008 was primarily related
to a $1.0 million favorable foreign exchange change caused by the strengthening of the U.S. dollar
against foreign currencies in the second half of fiscal 2009, partially offset by a decrease in
interest income of $0.8 million. Lower interest income was due to both lower interest rates and
lower average balances in our investment accounts.
37
Income Tax Expense
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change compared |
|
|
|
|
|
|
Change compared |
|
|
|
|
|
|
Year Ended |
|
|
to prior period |
|
|
Year Ended |
|
|
to prior period |
|
|
Year Ended |
|
(in thousands) |
|
January 31, 2010 |
|
|
$ |
|
|
% |
|
|
January 31, 2009 |
|
|
$ |
|
|
% |
|
|
January 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
$ |
1,108 |
|
|
$ |
(819 |
) |
|
|
(283 |
)% |
|
$ |
289 |
|
|
$ |
44 |
|
|
|
13 |
% |
|
$ |
333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of revenue |
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
|
|
45 |
% |
|
|
|
|
|
|
|
|
|
|
(1 |
)% |
|
|
|
|
|
|
|
|
|
|
6 |
% |
We recorded income tax expense of $1.1 million, $0.3 million and $0.3 million for fiscal
years 2010, 2009 and 2008, respectively. QADs effective tax rate was 45%, (1)%, and 6% for fiscal
years 2010, 2009 and 2008, respectively. Our income tax expense and effective tax rate increased in
fiscal 2010 when compared to fiscal 2009 primarily due to an increase in book income, a dividend
from a foreign subsidiary and a shortfall in our stock option deduction (i.e. the tax benefit
realized is less than the amount previously recognized through stock-based compensation expense).
Our income tax expense decreased in fiscal 2009 compared to fiscal 2008 primarily due to a decrease
in the effective rate associated with changes in the jurisdictional mix, and research and
development credits that were applied in the fourth quarter of fiscal 2009.
For further information regarding income taxes, see note 8 Income Taxes within the Notes to
Consolidated Financial Statements included in Item 15 of this Annual Report on Form 10-K.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of cash is from the sale of licenses, maintenance and services to our
customers. Our primary use of cash is payment of our operating costs which consist primarily of
employee-related expenses, such as compensation and benefits, as well as general operating expenses
for facilities and overhead costs. In addition to operating expenses, we also use cash for capital
expenditures and to invest in our growth initiatives, which could include acquisitions of products,
technology and businesses and funding of our dividend and stock repurchase programs.
During
fiscal 2010 we have focused on reducing expenses and conserving cash.
Our restructuring activities reduced headcount by approximately 250 people, or approximately 15%, when comparing January 31, 2010 to January 31,
2009. We saved over $8.7 million in non-billable travel expenses in fiscal 2010 compared to fiscal
2009. We made only critical capital expenditures during fiscal 2010 and, as a result, capital
expenditures decreased $5.4 million from the prior fiscal year. Finally, we modified our dividend
program to give investors the choice of a stock dividend or cash dividend payment, and because
holders of a majority of our shares chose a stock dividend, we were able to conserve cash. As a
result of our focus on reducing expenses and conserving cash, our cash balance has increased from
$31.5 million as of January 31, 2009 to $44.7 million as of January 31, 2010 despite a reduction in
revenues.
At January 31, 2010, our principal sources of liquidity were cash and equivalents totaling
$44.7 million and net accounts receivable of $61.1 million. At January 31, 2010, our cash and
equivalents consisted of current bank accounts, registered money market funds and time delineated
deposits. We had no investments in securities with an underlying exposure to sub-prime mortgages
nor did we hold auction rate notes or similar securities. Approximately 70% and 60% of our cash and
equivalents were held in U.S. dollar denominated accounts as of January 31, 2010 and 2009,
respectively. We have a U.S. line of credit facility that permits unsecured short-term borrowings
of up to $20 million. Our line of credit agreement contains customary covenants that could restrict
our ability to incur additional indebtedness or make dispositions of assets if we fail to comply
with them. Our line of credit is available for working capital or other business needs. We have not
drawn down on the line of credit during any of the last three fiscal years nor do we expect to draw
down on the line of credit during fiscal 2011. The facility expires in April 2011.
Our primary commercial banking relationship is with Bank of America and its global affiliates.
Our cash and equivalents are held by diversified financial institutions globally, and as of January
31, 2010 the portion of our cash and equivalents held by Bank of America was approximately 55%.
38
The following table summarizes our cash flows for the fiscal years ended January 31, 2010,
2009 and 2008, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
(in thousands) |
|
January 31, 2010 |
|
|
January 31, 2009 |
|
|
January 31, 2008 |
|
Net cash provided by operating activities |
|
$ |
17,696 |
|
|
$ |
7,253 |
|
|
$ |
15,875 |
|
Net cash used in investing activities |
|
|
(1,357 |
) |
|
|
(14,016 |
) |
|
|
(9,663 |
) |
Net cash used in financing activities |
|
|
(4,507 |
) |
|
|
(4,448 |
) |
|
|
(18,413 |
) |
Effect of foreign exchange rates on cash and
equivalents |
|
|
1,379 |
|
|
|
(2,935 |
) |
|
|
3,622 |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and equivalents |
|
$ |
13,211 |
|
|
$ |
(14,146 |
) |
|
$ |
(8,579 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by operating activities was $17.7 million for fiscal 2010 and
primarily comprised of cash flow from accounts receivable and the effect of non-cash expenses such
as depreciation and amortization and stock compensation expense offset by cash outflows for
accounts payable and other liabilities. The primary working capital source of cash was a decrease
in accounts receivable. The decrease in accounts receivable relates primarily to lower license and
services billings at the end of fiscal 2010 due to a decline in revenue. The primary working
capital use of cash was a decrease in accrued expenses primarily due to lower accrued severance and
lower accrued employee bonuses and commissions.
Capital expenditures decreased to $1.0 million in fiscal 2010 from $6.3 million in fiscal
2009. In fiscal 2010, capital expenditures related mainly to computer equipment and software. In
fiscal 2009, capital expenditures primarily related to computer equipment and software in addition
to leasehold improvements as a result of office moves in the Asia Pacific region. Although capital
expenditures may increase in future years, throughout fiscal 2010 we did not delay any critical
capital expenditures and we will continue to focus on conserving capital reserves throughout fiscal
2011. While cash preservation and strategic capital deployment continue to be a very high priority,
we anticipate increasing capital expenditures by approximately $1 to $2 million in fiscal 2011,
reflecting some additional investments in information technology. We do not anticipate any major
investment requirements in the leasehold improvement or building areas.
Dividend related payments for fiscal 2010 totaled $1.9 million compared to $3.1 million in
fiscal 2009. In fiscal 2010, we modified our dividend program to allow shareholders the choice of
stock or cash, which has enabled us to conserve cash. For the three quarterly dividends declared in
May 2009, June 2009 and September 2009, we made cash payments of $0.2 million, $0.2 million and
$0.6 million, respectively, as compared to $0.8 million of cash payments for each of the previously
declared dividends in fiscal 2009 and prior years. The fourth quarterly dividend was declared in
January 2010 and also has the choice of cash or stock. It is payable April 26, 2010. The shares
issued as a stock dividend are based on the fair value of the QAD common stock as of the record
date. The Board of Directors evaluates our ability to continue to pay dividends and the structure
of any dividends on a quarterly basis.
There were no stock repurchase related payments during fiscal 2010. We do not currently have a
stock repurchase program in place, however the Board of Directors evaluates our position relating
to future potential repurchases on a regular basis.
We have historically calculated accounts receivable days sales outstanding (DSO), using the
countback, or last-in first-out, method. This method calculates the number of days of billed
revenue represented by the accounts receivable balance as of period end. When reviewing the
performance of our entities, DSO under the countback method is used by management. It is
managements belief that the countback method best reflects the relative health of our accounts
receivable as of a given quarter-end or year-end because of the cyclical nature of our billings.
Our billing cycle includes high annual maintenance renewal billings at year-end that will not be
recognized as earned revenue until future periods.
DSO under the countback method was 54 days at January 31, 2010, compared to 75 days at January
31, 2009. DSO using the average method, which is calculated utilizing the accounts receivable
balance and earned revenue for the most recent quarter, was 104 days and 108 days at January 31,
2010 and 2009, respectively. The decrease in DSO was primarily related to an improvement in the
overall aging of our accounts receivable balances. We believe our reserve methodology is adequate
and our reserves are properly stated as of January 31, 2010. We will continue to monitor our
receivables closely given the economic environment.
39
There have been no material changes in our contractual obligations or commercial commitments.
Cash requirements for items other than normal operating expenses are anticipated for the following:
capital expenditures, dividend payments and funding restructuring costs. We may require cash for
acquisitions of new businesses, software products or technologies complementary to our business.
We believe that the cash on hand, net cash provided by operating activities and the available
borrowings under our existing credit facility will provide us with sufficient resources to meet our
current and long-term working capital requirements, debt service, dividend payments and other cash
needs for at least the next twelve months.
CONTRACTUAL OBLIGATIONS
The
following table summarizes our significant contractual obligations at January 31, 2010 and the
effect these contractual obligations are expected to have on our liquidity and cash flows in future
periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31, |
|
|
|
|
|
|
|
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015 |
|
|
Thereafter |
|
|
Total |
|
|
|
(In millions) |
|
Notes payable |
|
$ |
0.3 |
|
|
$ |
0.3 |
|
|
$ |
0.3 |
|
|
$ |
0.4 |
|
|
$ |
15.4 |
|
|
$ |
|
|
|
$ |
16.7 |
|
Notes payable interest payments |
|
|
1.1 |
|
|
|
1.1 |
|
|
|
1.1 |
|
|
|
1.0 |
|
|
|
0.5 |
|
|
|
|
|
|
|
4.8 |
|
Lease obligations |
|
|
7.8 |
|
|
|
5.3 |
|
|
|
2.8 |
|
|
|
1.2 |
|
|
|
0.6 |
|
|
|
1.5 |
|
|
|
19.2 |
|
Purchase obligations |
|
|
0.5 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9.7 |
|
|
$ |
7.0 |
|
|
$ |
4.2 |
|
|
$ |
2.6 |
|
|
$ |
16.5 |
|
|
$ |
1.5 |
|
|
$ |
41.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase obligations are contractual obligations for purchase of goods or services. They are defined as agreements that are enforceable and
legally binding on QAD and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable
price provisions; and the approximate timing of the transaction.
Purchase obligations relate primarily to information technology infrastructure costs and hosting
services agreements.
We have omitted unrecognized tax benefits from this table due to the inherent uncertainty
regarding the timing of potential issue resolution. Specifically, either (a) the underlying
positions have not been fully enough developed under audit to quantify at this time, or (b) the
years relating to the issues for certain jurisdictions are not currently under audit. As of January
31, 2010, we had $2.4 million of unrecognized tax benefits. For further information regarding the
unrecognized tax benefits see note 8 Income Taxes within Notes to Consolidated Financial
Statements.
Purchase orders or contracts for the purchase of supplies and other goods and services are not
included in the table above. We are not able to determine the aggregate amount of such purchase
orders that represent contractual obligations, as purchase orders may represent authorizations to
purchase rather than binding agreements. Our purchase orders are based on our current procurement
or development needs and are fulfilled by our vendors within short time frames. We do not have
significant agreements for the purchase of supplies or other goods specifying minimum quantities or
set prices that exceed our expected requirements for three months. In addition, we have certain
royalty commitments associated with the shipment and licensing of certain products. Royalty expense
is generally based on the number of units shipped or a percentage of the underlying revenue.
Royalty expense, included in cost of license fees, maintenance, service and other revenue, was $14.3
million, $17.0 million and $18.1 million in fiscal 2010, 2009 and 2008, respectively.
Credit Facility
Effective April 10, 2008, we entered into an unsecured loan agreement with Bank of America,
N.A. The agreement provides a three-year commitment for a $20 million line of credit (the
Facility). We pay an annual commitment fee of between 0.25% and 0.50% calculated on the average
unused portion of the $20 million Facility. The rate is determined by our ratio of funded debt to
our 12-month trailing EBITDA.
The Facility provided that we maintain certain financial and operating covenants which
include, among other provisions, a minimum total leverage ratio of 1.5 to 1.0, a minimum liquidity
ratio of 1.3 to 1.0, a minimum 12-month trailing EBITDA of $10 million and a minimum fixed charge
coverage ratio of 2.00 to 1.00. Borrowings under the Facility bear interest at a floating rate
based on LIBOR or prime plus the corresponding applicable margins, ranging from 0.75% to 1.75% for
the LIBOR option or -0.25% to 0.25% for the prime option, depending on our funded debt to 12-month
trailing EBITDA ratio. At January 31, 2010, a prime rate borrowing would have had an effective rate
of 3.0% and a 30-day LIBOR borrowing would have had an effective rate of approximately 0.98%.
Effective April 10, 2009, we executed an amendment to the Facility to amend the 12-month
trailing EBITDA and fixed charge ratio covenants for future reporting periods. For the reporting
period beginning February 1, 2009 through the expiration of the Facility, the minimum 12-month
trailing EBITDA was reduced to $5 million with the definition of EBITDA amended to exclude goodwill
impairment charges. The minimum fixed charge ratio was amended to 1.3 to 1.0 for the period
February 1, 2009 through October 31, 2009 and thereafter 1.5 to 1.0.
40
As of January 31, 2010 there were no borrowings under the Facility and we were in
compliance with the financial covenants of the Facility, as amended.
Notes Payable
In July 2004, we entered into a loan agreement with Mid-State Bank & Trust, a bank which was
subsequently purchased by Rabobank, N.A. The loan had an original principal amount of $18.0 million
and bears interest at a fixed rate of 6.5%. This loan is secured by our headquarters located in
Santa Barbara, California. The terms of the loan provide that we will make 119 monthly payments of
$115,000 consisting of principal and interest and one final principal payment of $15.4 million. The
loan matures in July 2014. The balance of the note payable at January 31, 2010 was $16.7 million.
Lease Obligations
We lease certain office facilities, office equipment and automobiles under operating lease
agreements. Future minimum rental payments under non-cancelable operating lease commitments with
terms of more than one year are included in the above table of contractual obligations. For further
discussion of our leased office facilities, see Item 2 entitled Properties included elsewhere in
this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
As of January 31, 2010 we did not have any off-balance sheet arrangements as defined in Item
303(a)(4)(ii) of SEC Regulation S-K.
|
|
|
ITEM 7A. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Foreign Exchange Rates. For fiscal years 2010 and 2009, approximately 35% of our revenue was
denominated in foreign currencies compared to 30% for fiscal year 2008. We also incurred a
significant part of our expenses in currencies other than the U.S. dollar, approximately 40% for
fiscal year 2010 and 45% for both fiscal years 2009 and 2008. As a result, fluctuations in the
values of the respective currencies relative to the currencies in which we generate revenue could
adversely affect us.
Fluctuations in currencies relative to the U.S. dollar have affected, and will continue to
affect, period-to-period comparisons of our reported results of operations. For fiscal years 2010,
2009 and 2008, foreign currency transaction and remeasurement (gains) losses totaled $(0.1)
million, $(0.1) million and $0.9 million, respectively, and are included in Other (income)
expense, net in our Consolidated Statements of Operations. Due to constantly changing currency
exposures and the volatility of currency exchange rates, we may experience currency losses in the
future and we cannot predict the effect of exchange rate fluctuations upon future operating
results. Although we do not currently undertake hedging transactions, we may choose to hedge a
portion of our currency exposure in the future, as we deem appropriate.
Interest Rates. We invest our surplus cash in a variety of financial instruments, consisting
principally of short-term marketable securities with maturities of less than 90 days at the date of
purchase. Our investment securities are held for purposes other than trading. Cash balances held by
subsidiaries are invested primarily in registered money market funds with local operating banks.
Our debt is comprised of a loan agreement, secured by real property, which bears interest at a
fixed rate of 6.5%. Additionally we have an unsecured loan agreement which bears interest at
variable rates. As of January 31, 2010 there were no borrowings under our unsecured loan agreement.
We prepared sensitivity analyses of our interest rate exposure and our exposure from
anticipated investment and borrowing levels for fiscal 2010 to assess the impact of hypothetical
changes in interest rates. Based upon the results of these analyses, a 10% adverse change in
interest rates from the 2010 fiscal year-end rates would not have a material adverse effect on the
fair value of investments and would not materially impact our results of operations or financial
condition for the next fiscal year.
41
|
|
|
ITEM 8. |
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The response to this item is included in Item 15 of this Annual Report on Form 10-K.
|
|
|
ITEM 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
|
|
|
ITEM 9A. |
|
CONTROLS AND PROCEDURES |
(a) Evaluation of Disclosure Controls and Procedures
QAD maintains disclosure controls and procedures that are designed to ensure that information
required to be disclosed in reports that it files or submits under the Securities Exchange Act of
1934 (the Exchange Act) is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms, and that such information is
accumulated and communicated to management to allow timely decisions regarding required disclosure.
QADs management, with the participation of the Chief Executive Officer and the Chief Financial
Officer, evaluated the effectiveness of QADs disclosure controls and procedures as of the end of
the period covered by this Annual Report on Form 10-K. Based on this evaluation, QADs principal
executive officer and principal financial officer have concluded that QADs disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective.
(b) Managements Report on Internal Control Over Financial Reporting
QADs management is responsible for establishing and maintaining adequate internal control
over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange
Act of 1934, as amended. QADs system of internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation
of consolidated financial statements for external purposes in accordance with generally accepted
accounting principles. QADs internal control over financial reporting includes those policies and
procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of QADs assets; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and that QADs receipts and
expenditures are being made only in accordance with authorizations of QADs management and
directors; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of QADs assets that could have a material effect on
the financial statements.
Management has assessed the effectiveness of QADs internal control over financial reporting
as of January 31, 2010 based on the criteria described in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on
managements assessment, management has concluded that QADs internal control over financial
reporting was effective as of January 31, 2010.
Our independent registered public accounting firm, KPMG LLP, has audited our internal control
over financial reporting as of January 31, 2010, as stated in their report included in this Annual
Report on Form 10-K.
(c) Changes in Internal Control over Financial Reporting
There were no changes in the Companys internal control over financial reporting identified in
connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15
that occurred during our last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, internal control over financial reporting.
(d) Limitations on the Effectiveness of Controls
QADs management does not expect that its disclosure controls and procedures or its internal
control over financial reporting will prevent all errors and all fraud. A control system, no matter
how well conceived and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all control issues and
instances of fraud, if any, within QAD have been detected. The design of any system of controls
also is based in part upon certain assumptions about the likelihood of future events, and there can
be no assurance that any design will succeed in achieving its stated goals under all potential
future conditions; over time, controls may become inadequate because of changes in conditions, or
the degree of compliance with policies or procedures may deteriorate.
42
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of QAD Inc.:
We have audited QAD Inc.s internal control over financial reporting as of January 31, 2010
based on criteria established in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). QAD Inc.s management is responsible
for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying report
entitled Managements Report on Internal Control Over Financial Reporting included in Item 9A.(b).
Our responsibility is to express an opinion on the Companys internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, QAD Inc. maintained, in all material respects, effective internal control over
financial reporting as of January 31, 2010, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of QAD Inc. and subsidiaries as of
January 31, 2010 and 2009, and the related consolidated statements of operations, stockholders
equity and comprehensive income (loss), and cash flows for each of the years in the three-year
period ended January 31, 2010, and our report dated April 15, 2010 expressed an unqualified opinion
on those consolidated financial statements.
/s/ KPMG LLP
Los Angeles, California
April 15, 2010
43
|
|
|
ITEM 9B. |
|
OTHER INFORMATION |
On March 24, 2010, we entered into a change in control agreement with our Chief Marketing
Officer. The agreement provides acceleration of certain equity awards and severance compensation
protection following a change in control of QAD. The specific terms of the agreement are described
herein under Item 11, Executive Compensation, which is a summary only and does not purport to be
complete. The agreement is filed herewith as Exhibit 10.10 and incorporated by reference under this
Item 9B.
44
PART III
|
|
|
ITEM 10. |
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Information regarding QAD directors is set forth in the section entitled Election of
Directors appearing in our Definitive Proxy Statement for the Annual Meeting of Stockholders
(Proxy Statement) to be filed with the Securities and Exchange Commission within 120 days after the
end of our fiscal year ended January 31, 2010, which information is incorporated herein by
reference.
In addition, the other information required by Item 10 is incorporated by reference from the
Proxy Statement.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information concerning our executive officers. All ages are as of
March 31, 2010.
|
|
|
|
|
|
|
NAME |
|
AGE |
|
POSITION(S) |
|
|
|
|
|
|
|
Pamela M. Lopker
|
|
|
55 |
|
|
Chairman of the Board and President |
Karl F. Lopker
|
|
|
58 |
|
|
Chief Executive Officer |
Daniel Lender
|
|
|
43 |
|
|
Executive Vice President and Chief Financial Officer |
Gordon Fleming
|
|
|
46 |
|
|
Executive Vice President and Chief Marketing Officer |
Kara Bellamy
|
|
|
34 |
|
|
Sr. Vice President, Corporate Controller and Chief Accounting Officer |
Pamela M. Lopker founded QAD in 1979 and has been Chairman of the Board and President since
QADs incorporation in 1981. Previously, Ms. Lopker served as Senior Systems Analyst for Comtek
Research from 1977 to 1979. She is certified in production and inventory management by the American
Production and Inventory Control Society. Ms. Lopker earned a bachelor of arts degree in
mathematics from the University of California, Santa Barbara. She is married to Karl F. Lopker,
Chief Executive Officer of QAD.
Karl F. Lopker has served as Chief Executive Officer and a Director of QAD since joining QAD
in 1981. Previously, he was President of Deckers Outdoor Corporation, a company that he founded in
1973. Mr. Lopker is certified in production and inventory management by the American Production and
Inventory Control Society. He received a bachelor of science degree in electrical engineering from
the University of California, Santa Barbara. Mr. Lopker is married to Pamela M. Lopker, Chairman of
the Board and President of QAD.
Daniel Lender was first appointed Executive Vice President and Chief Financial Officer in July
2003. Previously, he served as QADs Vice President of Global Sales Operations and Vice President
of Latin America. Mr. Lender joined QAD in 1998 as Treasurer following a nine-year tenure with the
former Republic National Bank of New York, last serving as Vice President and Treasurer of the
Banks Delaware subsidiary. He earned a master of business administration degree from the Wharton
School of the University of Pennsylvania and a bachelor of science degree in applied economics and
business management from Cornell University.
Gordon Fleming has served as Executive Vice President and Chief Marketing Officer since
December 2006. Previously he served in a number of roles including Vice President of Vertical
Marketing and Managing Director of QAD Australia Pty. Ltd. Mr. Fleming joined QAD as a Sales
Manager in July 1995, working in the Australian subsidiary. Mr. Fleming began his career as a
telecommunications engineer working in both the United Kingdom and Nigeria. Later Mr. Fleming moved
into corporate finance holding sales and marketing roles with Barclays plc and Schroders plc. Mr.
Fleming is a Member of the Institute of Electrical and Electronic Engineers (IEEE) and studied at
Worthing College of Technology, UK.
Kara Bellamy has served as Senior Vice President, Corporate Controller and Chief Accounting
Officer since January 2008. Previously, she served as QADs Corporate Controller beginning December
2006. She joined QAD as Assistant Corporate Controller in July 2004 after working for Somera
Communications, Inc. as its Corporate Controller from 2002 through 2004. Ms. Bellamy began her
career at the public accounting firm of Ernst & Young. She is a Certified Public Accountant and
received a bachelor of arts degree in business economics with an accounting emphasis from the
University of California, Santa Barbara.
45
|
|
|
ITEM 11. |
|
EXECUTIVE COMPENSATION |
Information regarding executive compensation is set forth under the caption Executive
Compensation in the Proxy Statement, which information is incorporated herein by reference.
|
|
|
ITEM 12. |
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Information regarding security ownership of certain beneficial owners and management is set
forth under the caption Stock Ownership of Directors, Executive Officers and Certain Beneficial
Owners in the Proxy Statement, which information is incorporated herein by reference.
|
|
|
ITEM 13. |
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Information regarding certain relationships and related transactions is set forth under the
caption Certain Transactions with Related Persons in the Proxy Statement, which information is
incorporated herein by reference.
|
|
|
ITEM 14. |
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Information regarding services performed by, and fees paid to, our independent auditors is set
forth under the caption Principal Accountant Fees and Services in the Proxy Statement, which
information is incorporated herein by reference.
46
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
1. FINANCIAL STATEMENTS
The following financial statements are filed as a part of this Annual Report on Form 10-K:
QAD INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
2. INDEX TO FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule is filed as a part of this Annual Report on Form
10-K:
All other schedules are omitted because they are not required or the required information is
presented in the financial statements or notes thereto.
3. INDEX TO EXHIBITS
See
the Index of Exhibits at page 84.
47
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
QAD Inc.:
We have audited the accompanying consolidated balance sheets of QAD Inc. and subsidiaries as
of January 31, 2010 and 2009, and the related consolidated statements of operations, stockholders
equity and comprehensive income (loss), and cash flows for each of the years in the three-year
period ended January 31, 2010. In connection with our audits of the consolidated financial
statements, we also have audited the related financial statement Schedule II. These consolidated
financial statements and financial statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated financial statements
and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of QAD Inc. and subsidiaries as of January 31, 2010 and
2009, and the results of their operations and their cash flows for each of the years in the
three-year period ended January 31, 2010, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), QAD Inc.s internal control over financial reporting as of January
31, 2010, based on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated April
15, 2010 expressed an unqualified opinion on the effectiveness of the Companys internal control
over financial reporting.
/s/ KPMG LLP
Los Angeles, California
April 15, 2010
48
QAD INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
January 31, |
|
|
|
2010 |
|
|
2009 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$ |
44,678 |
|
|
$ |
31,467 |
|
Accounts receivable, net of allowances of
$3,442 and $3,573 at January 31, 2010 and
2009, respectively |
|
|
61,089 |
|
|
|
70,954 |
|
Deferred tax assets, net |
|
|
3,548 |
|
|
|
4,372 |
|
Other current assets |
|
|
13,680 |
|
|
|
14,792 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
122,995 |
|
|
|
121,585 |
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
37,219 |
|
|
|
41,438 |
|
Capitalized software costs, net |
|
|
2,446 |
|
|
|
5,699 |
|
Goodwill |
|
|
6,348 |
|
|
|
6,237 |
|
Deferred tax assets, net |
|
|
19,411 |
|
|
|
16,219 |
|
Other assets, net |
|
|
2,755 |
|
|
|
2,567 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
191,174 |
|
|
$ |
193,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Current portion of long-term debt |
|
$ |
285 |
|
|
$ |
266 |
|
Accounts payable |
|
|
7,952 |
|
|
|
12,494 |
|
Deferred revenue |
|
|
85,745 |
|
|
|
81,392 |
|
Other current liabilities |
|
|
24,835 |
|
|
|
31,081 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
118,817 |
|
|
|
125,233 |
|
|
|
|
|
|
|
|
Long-term debt |
|
|
16,443 |
|
|
|
16,717 |
|
Other liabilities |
|
|
6,363 |
|
|
|
4,324 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value.
Authorized 5,000,000 shares; none issued or
outstanding |
|
|
|
|
|
|
|
|
Common stock, $0.001 par value. Authorized
150,000,000 shares; issued 35,351,281 shares
and 35,350,481 shares at January 31, 2010
and 2009, respectively |
|
|
35 |
|
|
|
35 |
|
Additional paid-in capital |
|
|
143,121 |
|
|
|
139,930 |
|
Treasury stock, at cost (4,011,526 shares
and 4,597,758 shares at January 31, 2010 and
2009, respectively) |
|
|
(32,275 |
) |
|
|
(36,614 |
) |
Accumulated deficit |
|
|
(52,480 |
) |
|
|
(49,103 |
) |
Accumulated other comprehensive loss |
|
|
(8,850 |
) |
|
|
(6,777 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
49,551 |
|
|
|
47,471 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
191,174 |
|
|
$ |
193,745 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
49
QAD INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended January 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
License fees |
|
$ |
28,452 |
|
|
$ |
46,673 |
|
|
$ |
61,491 |
|
Maintenance and other |
|
|
131,142 |
|
|
|
133,080 |
|
|
|
128,183 |
|
Services |
|
|
55,637 |
|
|
|
82,990 |
|
|
|
73,073 |
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
215,231 |
|
|
|
262,743 |
|
|
|
262,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of license fees |
|
|
6,941 |
|
|
|
9,752 |
|
|
|
9,794 |
|
Cost of maintenance, service and other revenue |
|
|
84,686 |
|
|
|
111,819 |
|
|
|
101,072 |
|
Sales and marketing |
|
|
51,979 |
|
|
|
73,025 |
|
|
|
71,016 |
|
Research and development |
|
|
37,303 |
|
|
|
43,107 |
|
|
|
41,069 |
|
General and administrative |
|
|
30,969 |
|
|
|
33,763 |
|
|
|
33,459 |
|
Amortization of intangibles from acquisitions |
|
|
482 |
|
|
|
734 |
|
|
|
749 |
|
Goodwill impairment loss |
|
|
|
|
|
|
14,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
212,360 |
|
|
|
286,606 |
|
|
|
257,159 |
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
2,871 |
|
|
|
(23,863 |
) |
|
|
5,588 |
|
Other (income) expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
(570 |
) |
|
|
(1,433 |
) |
|
|
(2,243 |
) |
Interest expense |
|
|
1,273 |
|
|
|
1,245 |
|
|
|
1,362 |
|
Other (income) expense, net |
|
|
(289 |
) |
|
|
(244 |
) |
|
|
720 |
|
|
|
|
|
|
|
|
|
|
|
Total other (income) expense |
|
|
414 |
|
|
|
(432 |
) |
|
|
(161 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
2,457 |
|
|
|
(23,431 |
) |
|
|
5,749 |
|
Income tax expense |
|
|
1,108 |
|
|
|
289 |
|
|
|
333 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
1,349 |
|
|
$ |
(23,720 |
) |
|
$ |
5,416 |
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share |
|
$ |
0.04 |
|
|
$ |
(0.77 |
) |
|
$ |
0.17 |
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share |
|
$ |
0.04 |
|
|
$ |
(0.77 |
) |
|
$ |
0.17 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
50
QAD INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
and Additional |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Total |
|
|
|
|
|
|
Paid-in Capital |
|
|
Treasury Stock |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Stockholders |
|
|
Comprehensive |
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Deficit |
|
|
Loss |
|
|
Equity |
|
|
Income (Loss) |
|
Balance, January 31, 2007 |
|
|
35,352 |
|
|
$ |
129,097 |
|
|
|
(3,061 |
) |
|
$ |
(22,870 |
) |
|
$ |
(22,307 |
) |
|
$ |
(7,348 |
) |
|
$ |
76,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of the adoption of FIN 48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
681 |
|
|
|
|
|
|
|
681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted balance at February 1, 2007 |
|
|
35,352 |
|
|
|
129,097 |
|
|
|
(3,061 |
) |
|
|
(22,870 |
) |
|
|
(21,626 |
) |
|
|
(7,348 |
) |
|
|
77,253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,416 |
|
|
|
|
|
|
|
5,416 |
|
|
$ |
5,416 |
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,478 |
|
|
|
2,478 |
|
|
|
2,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock award exercises |
|
|
7 |
|
|
|
10 |
|
|
|
689 |
|
|
|
5,125 |
|
|
|
(2,225 |
) |
|
|
|
|
|
|
2,910 |
|
|
|
|
|
Tax benefit from stock options |
|
|
|
|
|
|
216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
216 |
|
|
|
|
|
Dividends declared ($0.10 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,161 |
) |
|
|
|
|
|
|
(3,161 |
) |
|
|
|
|
Stock compensation expense |
|
|
|
|
|
|
6,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,162 |
|
|
|
|
|
Restricted stock |
|
|
(12 |
) |
|
|
(132 |
) |
|
|
12 |
|
|
|
132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned compensation-restricted stock |
|
|
|
|
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44 |
|
|
|
|
|
Repurchase of common stock |
|
|
|
|
|
|
|
|
|
|
(2,236 |
) |
|
|
(18,723 |
) |
|
|
|
|
|
|
|
|
|
|
(18,723 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 31, 2008 |
|
|
35,347 |
|
|
|
135,397 |
|
|
|
(4,596 |
) |
|
|
(36,336 |
) |
|
|
(21,596 |
) |
|
|
(4,870 |
) |
|
|
72,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,720 |
) |
|
|
|
|
|
|
(23,720 |
) |
|
$ |
(23,720 |
) |
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,907 |
) |
|
|
(1,907 |
) |
|
|
(1,907 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(25,627 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock award exercises |
|
|
3 |
|
|
|
(1 |
) |
|
|
187 |
|
|
|
1,382 |
|
|
|
(798 |
) |
|
|
|
|
|
|
583 |
|
|
|
|
|
Tax shortfall from stock options |
|
|
|
|
|
|
(355 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(355 |
) |
|
|
|
|
Stock compensation expense |
|
|
|
|
|
|
5,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,505 |
|
|
|
|
|
Dividends declared ($0.10 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,055 |
) |
|
|
|
|
|
|
(3,055 |
) |
|
|
|
|
Restricted stock |
|
|
|
|
|
|
(625 |
) |
|
|
75 |
|
|
|
559 |
|
|
|
66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned compensation-restricted stock |
|
|
|
|
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44 |
|
|
|
|
|
Repurchase of common stock |
|
|
|
|
|
|
|
|
|
|
(264 |
) |
|
|
(2,219 |
) |
|
|
|
|
|
|
|
|
|
|
(2,219 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 31, 2009 |
|
|
35,350 |
|
|
|
139,965 |
|
|
|
(4,598 |
) |
|
|
(36,614 |
) |
|
|
(49,103 |
) |
|
|
(6,777 |
) |
|
|
47,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,349 |
|
|
|
|
|
|
|
1,349 |
|
|
$ |
1,349 |
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,073 |
) |
|
|
(2,073 |
) |
|
|
(2,073 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(724 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock award exercises |
|
|
1 |
|
|
|
(6 |
) |
|
|
91 |
|
|
|
670 |
|
|
|
(392 |
) |
|
|
|
|
|
|
272 |
|
|
|
|
|
Stock compensation expense |
|
|
|
|
|
|
4,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,592 |
|
|
|
|
|
Dividends declared ($0.10 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,110 |
) |
|
|
|
|
|
|
(3,110 |
) |
|
|
|
|
Dividends paid in stock |
|
|
|
|
|
|
|
|
|
|
321 |
|
|
|
2,374 |
|
|
|
(1,149 |
) |
|
|
|
|
|
|
1,225 |
|
|
|
|
|
Restricted stock |
|
|
|
|
|
|
(1,395 |
) |
|
|
175 |
|
|
|
1,295 |
|
|
|
(75 |
) |
|
|
|
|
|
|
(175 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 31, 2010 |
|
|
35,351 |
|
|
$ |
143,156 |
|
|
|
(4,011 |
) |
|
$ |
(32,275 |
) |
|
$ |
(52,480 |
) |
|
$ |
(8,850 |
) |
|
$ |
49,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
51
QAD INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended January 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
1,349 |
|
|
$ |
(23,720 |
) |
|
$ |
5,416 |
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
9,992 |
|
|
|
11,134 |
|
|
|
9,417 |
|
Provision for doubtful accounts and sales adjustments |
|
|
2,025 |
|
|
|
1,665 |
|
|
|
690 |
|
Tax benefit from reversal of deferred tax valuation allowance |
|
|
(1,194 |
) |
|
|
(658 |
) |
|
|
|
|
Loss (gain) on disposal of property and equipment |
|
|
130 |
|
|
|
11 |
|
|
|
(73 |
) |
Deferred income taxes |
|
|
(1,344 |
) |
|
|
(3,563 |
) |
|
|
(2,730 |
) |
Goodwill impairment loss |
|
|
|
|
|
|
14,406 |
|
|
|
|
|
Exit costs |
|
|
217 |
|
|
|
385 |
|
|
|
59 |
|
Stock compensation expense |
|
|
4,592 |
|
|
|
5,516 |
|
|
|
6,206 |
|
Excess tax benefits from stock awards |
|
|
|
|
|
|
(75 |
) |
|
|
(216 |
) |
Other, net |
|
|
(554 |
) |
|
|
(474 |
) |
|
|
(485 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities, net of effects from acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
10,447 |
|
|
|
7,593 |
|
|
|
(13,881 |
) |
Other assets |
|
|
(153 |
) |
|
|
(397 |
) |
|
|
1,881 |
|
Accounts payable |
|
|
(2,457 |
) |
|
|
1,496 |
|
|
|
(1,558 |
) |
Deferred revenue |
|
|
2,872 |
|
|
|
(2,988 |
) |
|
|
8,943 |
|
Other liabilities |
|
|
(8,226 |
) |
|
|
(3,078 |
) |
|
|
2,206 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
17,696 |
|
|
|
7,253 |
|
|
|
15,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(963 |
) |
|
|
(6,338 |
) |
|
|
(5,165 |
) |
Proceeds from sale of marketable securities |
|
|
|
|
|
|
275 |
|
|
|
|
|
Capitalized software costs |
|
|
(426 |
) |
|
|
(894 |
) |
|
|
(1,428 |
) |
Restricted cash |
|
|
|
|
|
|
|
|
|
|
1,575 |
|
Acquisitions of businesses, net of cash acquired |
|
|
(14 |
) |
|
|
(7,059 |
) |
|
|
(4,749 |
) |
Proceeds from sale of property and equipment |
|
|
46 |
|
|
|
|
|
|
|
104 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(1,357 |
) |
|
|
(14,016 |
) |
|
|
(9,663 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of debt |
|
|
(255 |
) |
|
|
(288 |
) |
|
|
(277 |
) |
Dividends paid |
|
|
(1,873 |
) |
|
|
(3,067 |
) |
|
|
(3,188 |
) |
Net proceeds from issuance of common stock |
|
|
97 |
|
|
|
583 |
|
|
|
2,910 |
|
Excess tax benefits from stock awards |
|
|
|
|
|
|
75 |
|
|
|
216 |
|
Repurchase of common stock |
|
|
|
|
|
|
(2,219 |
) |
|
|
(18,723 |
) |
Changes in cash overdraft |
|
|
(2,476 |
) |
|
|
468 |
|
|
|
649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(4,507 |
) |
|
|
(4,448 |
) |
|
|
(18,413 |
) |
Effect of exchange rates on cash and equivalents |
|
|
1,379 |
|
|
|
(2,935 |
) |
|
|
3,622 |
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and equivalents |
|
|
13,211 |
|
|
|
(14,146 |
) |
|
|
(8,579 |
) |
Cash and equivalents at beginning of year |
|
|
31,467 |
|
|
|
45,613 |
|
|
|
54,192 |
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents at end of year |
|
$ |
44,678 |
|
|
$ |
31,467 |
|
|
$ |
45,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
1,230 |
|
|
$ |
1,184 |
|
|
$ |
1,292 |
|
Income taxes, net of refunds |
|
|
3,980 |
|
|
|
3,942 |
|
|
|
2,244 |
|
Supplemental disclosure of non-cash activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Obligations associated with dividend declaration |
|
|
780 |
|
|
|
768 |
|
|
|
781 |
|
Dividends paid in stock |
|
|
1,225 |
|
|
|
|
|
|
|
|
|
Obligations associated with acquisitions |
|
|
|
|
|
|
|
|
|
|
1,210 |
|
See accompanying notes to consolidated financial statements.
52
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
QAD is a global provider of enterprise software applications, and related services and
support. QADs main Enterprise Resource Planning (ERP) product suite is called QAD Enterprise
Applications, formerly marketed as MFG/PRO. The QAD Enterprise Applications suite provides a set of
capabilities designed to support core business operations and enable most
common business processes. The Company is principally focused on addressing the needs of global
manufacturing companies. Its solutions are configured to address the requirements of the following
specific manufacturing industries: automotive, consumer products, food and beverage, high
technology, industrial products and life sciences.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of QAD Inc. and all of its
subsidiaries. All subsidiaries are wholly-owned and all significant balances and transactions among
the consolidated entities have been eliminated from the financial statements.
USE OF ESTIMATES
The financial statements have been prepared in conformity with U.S. generally accepted
accounting principles and, accordingly, include amounts based on informed estimates and judgments
of management that affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the Companys financial statements, and the reported amounts
of revenue and expenses during the reporting period. Actual results could differ from those
estimates. Changes in estimates resulting from continuing changes in the economic environment will
be reflected in the financial statements in future periods.
The Company considers certain accounting policies related to revenue recognition, accounts
receivable allowances, long-lived assets, goodwill, capitalized software costs, valuation of
deferred tax assets and tax contingency reserves and accounting for stock-based compensation to be
critical policies due to the significance of these items to its operating results and the
estimation processes and management judgment involved in each.
PRIOR PERIOD REVISIONS
The results for the fiscal year and quarter ended January 31, 2009 have been revised from
previously reported amounts. The revision relates to revenue recognition of a customer contract
accounted for using contract accounting. During preparation of the Companys financial statements
for the first quarter of fiscal 2010, the Company determined that it could not reliably estimate
the costs of maintenance to be provided to the customer under the contract and accordingly could
not accrue the full gross profit under the percentage-of-completion method. The accounting for the
contract has been revised to apply the zero gross margin approach under the
percentage-of-completion method. Under this method, revenues are recorded only to the extent of
contract costs incurred. As a result, total revenue for the year and three months ended January 31,
2009 was reduced by $0.7 million and net loss and accumulated deficit were increased by $0.6
million. There was no impact to operating cash flows for any periods. The Company considers the
adjustment to be immaterial to the prior periods. The Company has also revised the previously
reported amounts for certain other items that were immaterial to the financial statements
individually as well as in the aggregate.
53
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
The following table summarizes the effect of the adjustment on the Companys prior period
consolidated financial statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously |
|
|
Effect of |
|
|
As |
|
|
|
Reported |
|
|
Adjustment |
|
|
Adjusted |
|
|
|
(in thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations for the year ended January 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance and other revenue |
|
$ |
133,717 |
|
|
$ |
(637 |
) |
|
$ |
133,080 |
|
Services revenue |
|
|
83,050 |
|
|
|
(60 |
) |
|
|
82,990 |
|
Total revenue |
|
|
263,440 |
|
|
|
(697 |
) |
|
|
262,743 |
|
Operating loss |
|
|
(23,166 |
) |
|
|
(697 |
) |
|
|
(23,863 |
) |
Loss before income taxes |
|
|
(22,734 |
) |
|
|
(697 |
) |
|
|
(23,431 |
) |
Income tax expense |
|
|
361 |
|
|
|
(72 |
) |
|
|
289 |
|
Net loss |
|
|
(23,095 |
) |
|
|
(625 |
) |
|
|
(23,720 |
) |
Per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per share |
|
|
(0.75 |
) |
|
|
(0.02 |
) |
|
|
(0.77 |
) |
Diluted net loss per share |
|
|
(0.75 |
) |
|
|
(0.02 |
) |
|
|
(0.77 |
) |
Balance Sheet as of January 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets |
|
|
19,092 |
|
|
|
72 |
|
|
|
19,164 |
|
Total current assets |
|
|
121,513 |
|
|
|
72 |
|
|
|
121,585 |
|
Total assets |
|
|
193,673 |
|
|
|
72 |
|
|
|
193,745 |
|
Deferred revenue |
|
|
80,695 |
|
|
|
697 |
|
|
|
81,392 |
|
Total current liabilities |
|
|
124,536 |
|
|
|
697 |
|
|
|
125,233 |
|
Accumulated deficit |
|
|
(48,478 |
) |
|
|
(625 |
) |
|
|
(49,103 |
) |
Total stockholders equity |
|
|
48,096 |
|
|
|
(625 |
) |
|
|
47,471 |
|
Total liabilities and stockholders equity |
|
|
193,673 |
|
|
|
72 |
|
|
|
193,745 |
|
CASH AND EQUIVALENTS
Cash and equivalents consist of cash and short-term marketable securities with maturities of
less than 90 days at the date of purchase. The Company considers all highly liquid investments
purchased with an original maturity of 90 days or less to be cash equivalents. At January 31, 2010
and 2009, the Companys cash equivalents consisted of Registered Money Market Funds and the Company
has no investments in securities with an underlying exposure to sub-prime mortgages. Additionally,
the Company has no holdings in auction rate notes or similar securities.
REVENUE RECOGNITION
The Company derives its revenues from the sale or the license of software products and from
support services, subscriptions, consulting, development, training, and other professional
services. The majority of the Companys software is sold or licensed in multiple-element
arrangements that include support services and often consulting services or other elements. The
Company licenses its software generally in multiple-element arrangements. For software license
arrangements that do not require significant modification or customization of the underlying
software, the Company recognizes revenue when persuasive evidence of an arrangement exists,
delivery has occurred, the fee is fixed or determinable, and collectibility is probable. A majority
of the Companys license revenue is recognized in this manner. Revenue is presented net of sales,
use and value-add taxes collected on behalf of its customers.
The Companys typical payment terms vary by region. Occasionally, payment terms of up to one
year may be granted for software license fees to customers with an established history of
collections without concessions. Should the Company grant payment
terms greater than one year or terms that are not in accordance with its established history for similar arrangements, it would
recognize revenue as payments become due assuming all other criteria for software revenue
recognition have been met.
54
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Provided all other revenue recognition criteria have been met, the Company recognizes license
revenue on delivery using the residual method when vendor-specific objective evidence of fair value
(VSOE) exists for all of the undelivered elements (for example, support services, consulting, or
other services) in the arrangement. The Company allocates revenue to each undelivered element based
on VSOE, which is the price charged when that element is sold separately or, for elements not yet
sold separately, the price established by the Companys management if it is probable that the price
will not change before the element is sold separately. The Company allocates revenue to undelivered
support services based on rates charged to renew the support services annually after an initial
period. The Company allocates revenue to undelivered consulting services based on time and
materials rates of stand-alone services engagements by role and by country. The Company reviews
VSOE at least annually. If the Company were to be unable to establish or maintain VSOE for one or
more undelivered elements within a multiple-element arrangement, it could adversely impact
revenues, results of operations and financial position because the Company may have to defer all or
a portion of the revenue or recognize revenue ratably from multiple-element arrangements.
Multiple element arrangements for which VSOE does not exist for all undelivered elements
typically occur when the Company introduces a new product or product bundles for which it has not
established VSOE for support services or consulting or other services under its VSOE policy. In
these instances, revenue is deferred and recognized ratably over the longer of the support services
(maintenance period) or consulting services engagement, assuming there are no specified future
deliverables. In the instances in which it has been determined that revenue on these bundled
arrangements will be recognized ratably due to lack of VSOE, at the time of recognition, the
Company allocates revenue from these bundled arrangement fees to all of the non-license revenue
categories based on VSOE of similar support services or consulting services. The remaining
arrangement fees, if any, are then allocated to software license fee revenues. The associated costs
primarily consist of payroll and related costs to perform both the consulting services and provide
support services and royalty expense related to the license and maintenance revenue. These costs
are included in cost of maintenance, services and other and cost of license based on the allocated
revenue categories.
Revenue from support services and product updates, referred to as maintenance revenue, is
recognized ratably over the term of the maintenance period, which in most instances is one year.
Software license updates provide customers with rights to unspecified software product upgrades,
maintenance releases and patches released during the term of the support period on a when-and-if
available basis. Product support includes Internet access to technical content, as well as Internet
and telephone access to technical support personnel. A majority of the Companys customers purchase
both product support and license updates when they acquire new software licenses. In addition, a
majority of customers renew their support services contracts annually.
Revenues from consulting services are typically comprised of implementation, development,
training or other consulting services. Consulting services are generally sold on a
time-and-materials basis and can include services ranging from software installation to data
conversion and building non-complex interfaces to allow the software to operate in integrated
environments. Consulting engagements can range anywhere from one day to several months and are
based strictly on the customers requirements and complexities and are independent of the
functionality of the Companys software. The Companys software, as delivered, can generally be
used by the customer for the customers purpose upon installation. Further, implementation and
integration services provided are generally not essential to the functionality of the software, as
delivered, and do not result in any material changes to the underlying software code. On occasion,
the Company enters into fixed fee arrangements for arrangements in which customer payments are tied
to achievement of specific milestones. In fixed fee arrangements, revenue is recognized as services
are performed as measured by hours incurred to date, as compared to total estimated hours to be
incurred to complete the work. In milestone achievement arrangements, the Company recognizes
revenue as the respective milestones are achieved.
Revenue from the Companys subscription product offerings, including On Demand products, is
recognized ratably over the contract period when the customer does not have the right to take
possession of the software. For subscription arrangements where the customer has the right and ability to take possession of the
software, revenue is recognized using the residual method.
55
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Although infrequent, when an arrangement does not qualify for separate accounting of the
software license and consulting transactions, the software license revenue is recognized together
with the consulting services based on contract accounting using either the percentage-of-completion
or completed-contract method. Arrangements that do not qualify for separate accounting of the
software license fee and consulting services typically occur when the Company is requested to
customize software or where the Company views the installation of its software as high risk in the
customers environment. This requires the Company to make estimates about the total cost to
complete the project and the stage of completion. The assumptions, estimates, and uncertainties
inherent in determining the stage of completion affect the timing and amounts of revenues and
expenses reported. Changes in estimates of progress toward completion and of contract revenues and
contract costs are accounted for using the cumulative catch up approach. In these arrangements, the
Company does not have a sufficient basis to estimate the costs of providing support services. As a
result, revenue is typically recognized on a percent completion basis up to the amount of costs
incurred (zero margin). Once the consulting services are complete and support services are the
only undelivered item, the remaining revenue is recognized evenly over the remaining support
period. If the Company does not have a sufficient basis to measure the progress of completion or to
estimate the total contract revenues and costs, revenue is recognized when the project is complete
and, if applicable, final acceptance is received from the customer. The Company allocates these
bundled arrangement fees to support services and consulting services revenues based on VSOE. The
remaining arrangement fees are then allocated to software license fee revenues. The associated
costs primarily consist of payroll and related costs to perform the
consulting and support services and royalty expense
and are included in cost of license, maintenance, services and other based on the allocation of the
related revenue categories.
The Company executes arrangements through indirect sales channels via sales agents and
distributors in which the indirect sales channels are authorized to market its software products to
end users. In arrangements with sales agents, revenue is recognized on a sell-through basis once an
order is received from the end user, collectibility from the end user is probable, a signed license
agreement from the end user has been received by the Company, delivery has been made to the end
user and all other revenue recognition criteria have been satisfied. Sales agents are compensated
on a commission basis. Distributor arrangements are those in which the resellers are authorized to
market and distribute our software products to end users in specified territories and the
distributor bears the risk of collection from the end user customer. The Company recognizes revenue
from transactions with distributors when the distributor submits a written purchase commitment,
collectibility from the distributor is probable, a signed license agreement is received from the
distributor and delivery has occurred to the distributor, provided that all other revenue
recognition criteria have been satisfied. Revenue for distributor transactions is recorded on a net
basis (the amount actually received by the Company from the distributor). The Company does not
offer rights of return, product rotation or price protection to any of its distributors.
ACCOUNTS RECEIVABLE ALLOWANCES
The Company reviews the collectibility of its accounts receivable each period by analyzing
balances based primarily on age and records specific allowances for any balances that it determines
may not be fully collectible due to inability of the customer to pay. The Company also provides an
additional reserve based on historical data including analysis of write-offs and other known
factors. The allowance for sales adjustments primarily relates to reserves required to adjust
revenue to the amount that will actually be realized. Provisions to the allowance for doubtful
accounts are included in bad debt expense in general and administrative expense and provisions for
sales adjustments are recorded against revenue.
56
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
LONG-LIVED ASSETS
Long-lived assets generally consist of property and equipment and intangible assets other than
goodwill.
Property and equipment are stated at cost. Additions and significant improvements to property and
equipment
are capitalized, while maintenance and repairs are expensed. For financial reporting purposes,
depreciation is generally expensed via the straight-line method over the useful life of three years
for computer equipment and
software, five years for furniture and office equipment, 10 years for building improvements, and 39
years for buildings. Leasehold improvements are depreciated over the shorter of the lease term or
the useful life of five years.
Certain costs associated with software developed for internal use, including direct costs of
materials, services and payroll costs for employees for time devoted to the software projects, are
capitalized once the project has reached the application development stage and are included in
property and equipment classified as software. These costs are amortized using the straight-line
method over the expected useful life of the software, beginning when the asset is substantially
ready for use. Costs incurred during the preliminary project stage, maintenance and training costs
and research and development costs are expensed as incurred.
Intangible assets, other than goodwill, arise from business combinations and generally consist
of customer relationships, restrictive covenants related to employment agreements, trade names and
intellectual property that are amortized, on a straight-line
basis, generally over periods of up to five
years. Finite-lived intangible assets are required to be amortized over their useful lives and are
subject to impairment evaluation. The Company assesses the realizability of its long-lived assets
and related intangible assets, other than goodwill, whenever changes in circumstances indicate the
carrying values of such assets may not be recoverable. The Company considers the following factors
important in determining when to perform an impairment review: significant under-performance of a
product relative to budget; shifts in business strategies which affect the continued uses of the
assets; significant negative industry or economic trends; and the results of past impairment
reviews.
In assessing the recoverability of these long-lived assets, the Company first compares
undiscounted cash flows expected to be generated by that asset or asset group to its carrying
value. If the carrying value of the long-lived asset or asset group is not recoverable on an
undiscounted cash flow basis, impairment is recognized to the extent that the carrying value
exceeds its fair value. Fair value of the assets or asset groups is determined through various
valuation techniques including discounted cash flow models, quoted market values and independent
third party appraisals, as considered necessary. In addition to recoverability assessments, the
Company routinely reviews the remaining estimated useful lives of its long-lived assets. Any
reduction in the useful life assumption will result in increased depreciation and amortization
expense in the quarter when such determinations are made, as well as in subsequent quarters.
GOODWILL
Goodwill represents the excess of the purchase price over the fair value of net assets of
purchased businesses. Goodwill is not amortized, but instead is subject to impairment tests on at
least an annual basis and whenever circumstances suggest that goodwill may be impaired. The Company
tests goodwill for impairment in the fiscal fourth quarter of each year. The Company performs a
two-step impairment test. Under the first step of the goodwill impairment test, the Company is
required to compare the fair value of a reporting unit with its carrying amount, including
goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the
reporting unit is not considered impaired and the second step is not performed. If the results of
the first step of the impairment test indicate that the fair value of a reporting unit does not
exceed its carrying amount, then the second step of the goodwill impairment test is required. The
second step of the goodwill impairment test compares the implied fair value of the reporting unit
goodwill with the carrying amount of that goodwill. The impairment loss is measured by the excess
of the carrying amount of the reporting unit goodwill over the implied fair value of that goodwill.
57
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Effective February 1, 2009, the Company determined that it has one reporting unit. Management
evaluates the Company as a single reporting unit for business and operating purposes as almost all
of the Companys revenue streams are generated by the same underlying technology whether acquired,
purchased or developed. In addition, the majority of QADs costs are, by their nature, shared
costs that are not specifically
identifiable to a geography or product line but relate to almost all products. As a result, there
is a high degree of interdependency among the Companys revenues and cash flows for levels below
the consolidated entity and identifiable cash flows for a reporting unit separate from the consolidated entity are not
meaningful. Therefore, the Companys impairment test considered the consolidated entity as a single
reporting unit.
Prior to February 1, 2009, the Company allocated goodwill to four geographic reporting units.
Accordingly, goodwill impairment tests were conducted annually for each of the four reporting
units. Prior to combining reporting units on February 1, 2009, the Company performed an impairment
test on each of the three reporting units that had goodwill remaining and determined there was no
impairment to any reporting unit. This change in reporting unit structure was brought about by an
internal reorganization of the Companys sales operations and de-emphasis on regional results as a
result of the importance of the global nature of the Companys
customer base. An example of the
Companys internal reorganization
is the creation of the strategic accounts group, which is accountable for sales to QADs
multi-national customers, irrespective of geography, who generate a large portion of QADs revenue.
The purpose of the strategic accounts group within the sales organization is to provide additional
expertise and devote additional time to global customer accounts with revenues spanning across all
regions. In order to serve
this base of global customers, the Company must maintain a presence in certain foreign locations
where it may not be profitable to do so and sales and support efforts are devoted to these
customers irrespective of where the end users are located.
CAPITALIZED SOFTWARE COSTS
The Company capitalizes software purchased from third parties or through business combinations
as acquired software technology, if the related software under development has reached
technological feasibility. In addition, the Company capitalizes software development costs incurred
in connection with the localization and translation of its products once technological feasibility
has been achieved based on a working model. A working model is defined as an operative version of
the computer software product that is completed in the same software language as the product to be
ultimately marketed, performs all the major functions planned for the product and is ready for
initial customer testing (usually identified as beta testing).
The amortization of capitalized software costs is the greater of the straight-line basis over
three years, the expected useful life, or computed using a ratio of current revenue for a product
compared to the estimated total of current and future revenues for that product. The Company
periodically compares the unamortized capitalized software costs to the estimated net realizable
value of the associated product. The amount by which the unamortized capitalized software costs of
a particular software product exceeds the estimated net realizable value of that asset would be
reported as a charge to the Consolidated Statement of Operations.
STOCKBASED COMPENSATION
The Company accounts for stock-based compensation using a fair value method. Share-based
compensation cost is measured at the grant date based on the value of the award and is expensed
ratably over the vesting period. Determining the fair value of stock-based awards at the grant date
requires judgment, including estimating the expected life of the award and estimating the
percentage of awards that will be forfeited and other inputs. If actual forfeitures differ
significantly from the estimates, stock-based compensation expense and the Companys results of
operations could be materially impacted.
Equity instruments issued to non-employees in exchange for services are initially measured and
recorded at fair value on the grant date. The fair value of the equity instruments is re-measured
each period until the instruments vest. The incremental change is recorded as an expense in the
period in which the change occurred.
Upon the exercise of stock options or stock appreciation rights or upon the release of restricted stock, the
Company will issue treasury stock. If treasury stock is not available, the Company will issue new
shares of common stock.
58
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
INCOME TAXES
The Company recognizes deferred tax assets and liabilities for temporary differences between
the financial reporting basis and the tax basis of its assets and liabilities and expected benefits
of utilizing net operating loss and credit carryforwards. In assessing whether there is a need for
a valuation allowance on deferred tax assets, the Company determines whether it is more likely than
not that it will realize tax benefits associated with deferred tax assets. In making this
determination, the Company considers future taxable income and tax planning strategies that are
both prudent and feasible. For deferred tax assets that cannot be recognized under the
more-likely-than-not-standard, the Company has established a valuation allowance. The impact on
deferred taxes of changes in tax rates and laws, if any, are reflected in the financial statements
in the period of enactment. No provision is made for taxes on unremitted earnings of foreign
subsidiaries because they are considered to be reinvested indefinitely in such operations.
The Company records a liability for taxes to address potential exposures involving uncertain tax
positions that could be challenged by taxing authorities, even though
the Company believes that the positions
taken are appropriate. The tax reserves are reviewed as circumstances warrant and adjusted as
events occur that affect the Companys potential liability for additional taxes. The Company is subject to
income taxes in the U.S. and in various foreign jurisdictions, and in the ordinary course of
business there are many transactions and calculations where the ultimate tax determination is
uncertain. For tax positions that are more likely than not of being sustained upon audit, the
Company recognizes the largest amount of the benefit that is greater than 50% likely of being
realized upon ultimate settlement in the financial statements. For tax positions that are not more
likely than not of being sustained upon audit, the Company does not recognize any portion of the
benefit in the financial statements.
COMPUTATION OF NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net income (loss) per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended January 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands, except per share data) |
|
Net income (loss) |
|
$ |
1,349 |
|
|
$ |
(23,720 |
) |
|
$ |
5,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstandingbasic |
|
|
31,017 |
|
|
|
30,675 |
|
|
|
31,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average of potential common shares issued using
the treasury stock method |
|
|
1,250 |
|
|
|
|
|
|
|
738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock and potential
common shares outstandingdiluted |
|
|
32,267 |
|
|
|
30,675 |
|
|
|
32,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share |
|
$ |
0.04 |
|
|
$ |
(0.77 |
) |
|
$ |
0.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share |
|
$ |
0.04 |
|
|
$ |
(0.77 |
) |
|
$ |
0.17 |
|
|
|
|
|
|
|
|
|
|
|
Potential common shares consist of the shares issuable upon the release of restricted stock
units (RSUs) and the exercise of stock options and stock appreciation rights (SARs) using the
treasury stock method. The Companys unvested RSUs, stock options and SARs are not considered
participating securities as they do not have rights to dividends or dividend equivalents prior to
release of exercise. Shares of common stock equivalents of approximately 3.9 million, 6.4 million
and 3.4 million for fiscal 2010, 2009 and 2008, respectively, were not included in the diluted
calculation because they were anti-dilutive.
59
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of the Companys foreign subsidiaries are
generally determined using the countrys local currency as the functional currency. Assets and
liabilities recorded in foreign currencies are translated at the exchange rates on the balance
sheet date. Revenue and expenses are translated at average rates of
exchange prevailing during the year. Translation adjustments resulting from this process are
charged or credited to other comprehensive income (loss), which is included in Accumulated other
comprehensive loss within the Consolidated Balance Sheets.
Gains and losses resulting from foreign currency transactions and remeasurement adjustments of
monetary assets and liabilities not held in an entitys functional currency are included in
earnings. Foreign currency transaction and remeasurement (gains) losses for fiscal 2010, 2009 and
2008 totaled $(0.1) million, $(0.1) million and $0.9 million, respectively, and are included in
Other (income) expense, net in the accompanying Consolidated Statements of Operations.
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The carrying amounts of cash and equivalents, accounts receivable and accounts payable
approximate fair value due to the short-term maturities of these instruments. The Companys line of
credit bears a variable market interest rate, subject to certain minimum interest rates. Therefore,
should the Company have any amounts outstanding under the line of credit, the carrying value of the
line of credit would reasonably approximate fair value. The Companys note payable bears a fixed
rate of 6.5%. The estimated fair value of the note payable was approximately $17.4 million at
January 31, 2010 and the carrying value was $16.7 million. The estimated fair value of the note
payable is based primarily on expected market prices for bank loans with similar terms and
maturities.
Concentration of credit risk with respect to trade receivables is limited due to the large
number of customers comprising our customer base, and their dispersion across many different
industries and locations throughout the world. No single customer accounted for 10% or more of the
Companys total revenue in any of the last three fiscal years. In addition, no single customer
accounted for 10% or more of accounts receivable at January 31, 2010 or January 31, 2009.
RESEARCH AND DEVELOPMENT
All costs incurred to establish the technological feasibility of the Companys
software products are expensed to research and development as incurred.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes changes in the balances of items that are reported
directly as a separate component of Stockholders Equity on the Consolidated Balance Sheets. The
components of comprehensive income (loss) are net income (loss) and foreign currency translation
adjustments. The Company does not provide for income taxes on foreign currency translation
adjustments since it does not provide for taxes on the unremitted earnings of its foreign
subsidiaries. The changes in Accumulated other comprehensive loss are included in the Companys
Consolidated Statement of Stockholders Equity and Comprehensive Income (Loss).
60
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
RECENT ACCOUNTING STANDARDS
Recently Issued Accounting Standards
Fair Value Disclosures
In January 2010, the FASB issued amended standards that require additional fair value disclosures.
These amended standards require disclosures about inputs and valuation techniques used to measure
fair value as well as disclosures about significant transfers. This guidance is effective for
interim and annual reporting periods beginning after December 15, 2009. Additionally, these amended
standards require presentation of disaggregated activity within the reconciliation for fair value
measurements using significant unobservable inputs (Level 3). These disclosures are effective for
fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.
The Company does not expect these new standards to significantly impact its consolidated financial
statements.
Fair Value Measurement
In August 2009, the FASB issued authoritative guidance for fair value measurements and
disclosures for liabilities to provide additional guidance on the valuation techniques used in fair
value measurements of liabilities of a reporting entity. The Company will adopt this revised
authoritative guidance for fair value measurements and disclosures for liabilities as of February
1, 2010, and is currently evaluating the impact that this guidance will have on the consolidated
financial statements.
Recently Adopted Accounting Standards
Accounting Standards Codification
In June 2009, the FASB issued the FASB Accounting Standards Codification (the Codification
or ASC), which identifies the sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP in the United States. The Company adopted this standard as of
October 31, 2009. The adoption of this standard changed how the Company references GAAP when
preparing its financial statement disclosures, but had no impact on the Companys financial
position, results of operations or cash flows.
Subsequent Events
In May 2009, the FASB issued authoritative guidance which established general standards of
accounting and disclosure of events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. In particular, it established that reporting
entities must evaluate subsequent events through the date the financial statements are issued, the
circumstances under which a subsequent event should be recognized, and the circumstances for which
a subsequent event should be disclosed. The Company adopted this guidance as of July 31, 2009.
In February 2010, the FASB issued Accounting Standards Update (ASU) 2010-09 regarding ASC
Topic 855 Subsequent Events. This ASU removes the requirement for SEC filers to disclose the date
through which management evaluated subsequent events in the financial statements, and was effective
upon its issuance. The Company adopted the ASU upon issuance. The adoption did not have an impact
on the Companys consolidated financial position, results of operations or cash flows.
61
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Business Combinations
In December 2007, the FASB revised its guidance on business combinations. The revised
standards significantly change the accounting for business combinations in a number of areas
including the treatment of contingent consideration, preacquisition contingencies, transaction
costs, in-process research and development and restructuring costs. In addition, changes in an
acquired entitys deferred tax assets and uncertain tax positions after the measurement period will
impact income tax expense. The revised standards establish new disclosure requirements to enable
users of the financial statements to evaluate the nature and financial effects of the business
combination. The revised standards also amend the accounting for income taxes, such that
adjustments made to deferred taxes and acquired tax contingencies after February 1, 2009, even for
business combinations completed before this date, will impact net income. The statement also
establishes disclosure requirements which will enable financial statement users to evaluate the
nature and financial effects of the business combination.
In April 2009, the FASB further revised its guidance regarding the accounting for assets
acquired and liabilities assumed in a business combination that arise from contingencies. It
amended the provisions in the December 2007 guidance for the recognition measurement and
disclosures of assets and liabilities arising from contingencies in business combinations, and
carries forward most of the previous provisions for acquired contingencies. This new guidance was
effective for fiscal years beginning after December 15, 2008. The Company did not initiate any
acquisitions during fiscal 2010, but the requirements of this guidance will apply to any
acquisitions that the Company may commence subsequent to its adoption by the Company on February 1,
2009.
Minority Interests
In December 2007, the FASB revised its guidance for non-controlling interests. The changes
impact the accounting and reporting for minority interests, which will be recharacterized as
non-controlling interests and classified as a separate component of equity, not as a liability or
other item outside of equity. The guidance was effective for the Company beginning February 1,
2009, and its adoption did not have a material effect on the Companys financial position, results
of operations or cash flows. The Company did not reclassify balances related to its non-controlling
interest retrospectively to its financial statements as balances and transactions with its
non-controlling interest were not material.
2. FAIR VALUE MEASUREMENTS
The following table sets forth the financial assets, measured at fair value, as of January 31,
2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurement at reporting date using |
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
Significant |
|
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Unobservable Inputs |
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
|
(in thousands) |
|
Money market mutual
funds as of
January 31, 2010 |
|
$ |
26,930 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market mutual
funds as of
January 31, 2009 |
|
|
18,586 |
|
|
|
|
|
|
|
|
|
Money market mutual funds are classified as part of Cash and equivalents in the accompanying
Condensed Consolidated Balance Sheets. As of January 31, 2010
and 2009, the amount of cash and cash
equivalents included cash deposited with commercial banks of
$17.8 million and $12.9 million,
respectively.
62
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. BUSINESS COMBINATIONS
Thailand Subsidiary Minority Interest
The minority shareholders of the Companys subsidiary in Thailand exercised their put option
in April 2007 to sell their shares, representing 25% ownership in the Thailand subsidiary, at fair
value to the Company. During the first quarter of fiscal 2009, the execution of the put was
finalized and $1.2 million was paid to the minority shareholders. Subsequent to the execution of
the put, the Company obtained 100% ownership of the Thailand subsidiary. Results of operations and
balances of the non-controlling interest were not material to the consolidated financial statements
as of any date or for any period prior to February 1, 2009.
Acquisitions
The results of operations of the following acquired businesses are included in the
Consolidated Financial Statements from the respective dates of acquisition. The Company completed
all business combinations discussed below with the purpose of expanding its product offerings and
driving revenue growth. The acquisitions were not deemed material, either individually or in the
aggregate, thus, pro forma supplemental information has not been provided.
FullTilt
On April 28, 2008, the Company acquired certain assets of FullTilt Solutions, Inc. (FullTilt),
in a transaction that constitutes a business combination. FullTilt is a provider of enterprise
product information management software solutions. The total purchase price including acquisition
expenses was $1.2 million. The purchase price was allocated to net tangible assets acquired of $0.2
million, amortizable intangible assets comprised of intellectual property, trade name and customer
relationships, totaling $0.6 million and goodwill of $0.4 million.
FBO Systems, Inc.
In November 2006, the Company acquired FBO Systems, Inc. (FBOS), a
provider of enterprise asset management software. The purchase price included $2.0 million paid in
cash at closing, a deferred payment of $0.8 million paid February 2007 and contingent performance
payments over the succeeding three years based on revenue growth. Revenue targets were achieved in
fiscal 2009 and as a result $0.8 million was paid. Revenue targets were not achieved in fiscal 2008
or fiscal 2010. The contingency period expired in November 2009.
Precision Software Limited
In September 2006, the Company acquired Precision Software Limited
(Precision), a provider of transportation management software
solutions. The purchase price included $8.1 million paid in cash at
closing and two additional payments upon each of the first and
second anniversaries of the closing. The first anniversary payment of $3.7 million was made in
September 2007. A second and final payment of $3.5 million was made in September 2008.
Bisgen Ltd.
In
June 2006, the Company acquired Bisgen Ltd. (Bisgen), a provider of Customer
Relationship Management (CRM) software. The purchase price was approximately $1.1 million and
included contingent consideration whereby the Company will pay an earn-out to Bisgen based on
future license sales related to CRM, of which a minimum of $0.2 million is guaranteed. The
contingency period is five years from the acquisition date. The Company has paid approximately $0.1
million to date, of which $14,000 was paid in fiscal 2010, and
expects to pay the remaining minimum consideration of $0.1
million by June 2011.
63
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. CAPITALIZED SOFTWARE COSTS
Capitalized software costs and accumulated amortization at January 31, 2010 and 2009 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
January 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
|
Capitalized software costs: |
|
|
|
|
|
|
|
|
Acquired software technology |
|
$ |
4,402 |
|
|
$ |
8,594 |
|
Capitalized software development costs |
|
|
4,167 |
|
|
|
3,808 |
|
|
|
|
|
|
|
|
|
|
|
8,569 |
|
|
|
12,402 |
|
Less accumulated amortization |
|
|
(6,123 |
) |
|
|
(6,703 |
) |
|
|
|
|
|
|
|
Capitalized software costs, net |
|
$ |
2,446 |
|
|
$ |
5,699 |
|
|
|
|
|
|
|
|
The acquired software technology costs primarily relate to technology purchased from the
Companys fiscal 2007 acquisitions of Precision, Soft Cell and Bisgen and from the FullTilt
acquisition completed in fiscal 2009. QAD acquired the rights to the SoftCell technology in two
steps: co-ownership rights in fiscal 2006 and full ownership rights as part of the fiscal 2007
acquisition. In addition to the acquired software technology, the Company has capitalized
internally developed software costs related to the Soft Cell technology and costs related to
translations and localizations of QAD Enterprise Applications.
It is the Companys policy to write-off capitalized software development costs once fully
amortized. Accordingly, during fiscal 2010, $4.8 million of costs and accumulated amortization was
removed from the balance sheet.
Amortization of capitalized software costs for fiscal 2010, 2009 and 2008 was $3.8 million,
$4.2 million and $2.7 million, respectively. Amortization of capitalized software costs is included
in Cost of license fees in the accompanying Consolidated Statements of Operations. The estimated
remaining amortization expense related to capitalized software costs for the years ended January
31, 2011, 2012 and 2013 is $2.0 million, $0.3 million and $0.1 million, respectively.
5. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The changes in the carrying amount of goodwill for the fiscal years ended January 31, 2010 and
2009 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Balance at February 1 |
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
21,845 |
|
|
$ |
23,793 |
|
Accumulated impairment losses |
|
|
(15,608 |
) |
|
|
(1,202 |
) |
|
|
|
|
|
|
|
|
|
|
6,237 |
|
|
|
22,591 |
|
|
|
|
|
|
|
|
Additions |
|
|
|
|
|
|
1,203 |
|
Goodwill impairment loss |
|
|
|
|
|
|
(14,406 |
) |
Impact of foreign currency translation |
|
|
111 |
|
|
|
(3,151 |
) |
|
|
|
|
|
|
|
Balance at January 31 |
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
21,956 |
|
|
$ |
21,845 |
|
Accumulated impairment losses |
|
|
(15,608 |
) |
|
|
(15,608 |
) |
|
|
|
|
|
|
|
|
|
|
6,348 |
|
|
|
6,237 |
|
|
|
|
|
|
|
|
64
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. GOODWILL AND INTANGIBLE ASSETS (Continued)
There were no additions to goodwill in fiscal 2010. The additions to goodwill in fiscal 2009
were due to the FullTilt acquisition totaling $0.4 million and goodwill of $0.8 million was
recorded related to a performance payment made in connection with the fiscal 2007 acquisition of
FBO Systems, Inc.
During the fourth quarter of fiscal 2010, an impairment analysis was performed at the
enterprise level which compared the Companys market capitalization to its net assets as of the
test date, November 30th. As the market capitalization exceeded the Companys net assets, there was
no indication of goodwill impairment for fiscal 2010.
Prior to fiscal 2010, the Companys reporting units were identified at the geographic level:
North America, EMEA, Asia Pacific and Latin America. During the fourth quarter of fiscal 2009
and 2008, the Company performed its annual goodwill impairment analysis for each reporting unit, based on geography.
Upon completion of the fiscal 2009 impairment assessment, the Company determined that the
carrying value of the EMEA reporting unit exceeded its estimated fair value. Because indicators of
impairment existed for this reporting unit, the Company performed the second step of the test to
determine the fair value of the goodwill of the EMEA reporting unit. The implied fair value of
goodwill was determined in the same manner utilized to estimate the amount of goodwill recognized
in a business combination. As part of the second step of the impairment test, the Company
calculated the fair value of certain assets, including distribution network, developed technology,
trade name and workforce. To determine the implied value of goodwill, fair values were allocated to
the assets and liabilities of the EMEA reporting unit as of November 30, 2008. The implied fair
value of goodwill was measured as the excess of the fair value of the EMEA reporting unit over the
amounts assigned to its assets and liabilities. The impairment loss for the EMEA reporting unit was
measured by the amount the carrying value of goodwill exceeded the implied fair value of the
goodwill. Based on this assessment, the Company recorded a charge of $14.4 million in the fourth
quarter of fiscal 2009, which represented all of the goodwill related to the EMEA reporting unit.
The primary factor contributing to this impairment charge was the recent significant economic
downturn in the fourth quarter of fiscal 2009, which caused a decline in revenue and cash flow
projections.
Upon completion of the fiscal 2008 annual impairment assessment, the Company determined no
impairment was indicated as the estimated fair value of each reporting unit exceeded its respective
carrying value.
Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
January 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
Amortizable intangible assets |
|
|
|
|
|
|
|
|
Customer relationships |
|
$ |
164 |
|
|
$ |
1,534 |
|
Trade name |
|
|
|
|
|
|
501 |
|
Covenant not to compete |
|
|
|
|
|
|
135 |
|
|
|
|
|
|
|
|
|
|
|
164 |
|
|
|
2,170 |
|
Less accumulated amortization |
|
|
(96 |
) |
|
|
(1,638 |
) |
|
|
|
|
|
|
|
Net amortizable intangible assets |
|
$ |
68 |
|
|
$ |
532 |
|
|
|
|
|
|
|
|
The Companys intangible assets as of January 31, 2010 were related to the FullTilt
acquisition completed in fiscal 2009. The intangible assets as of January 31, 2009 also include
intangible assets related to the Bisgen, Precision and FBOS acquisitions completed in fiscal 2007.
It is the Companys policy to write-off amortizable intangible assets once fully amortized.
Accordingly, during fiscal 2010, $2.2 million of amortizable intangible assets and accumulated
amortization was removed from the balance sheet.
65
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. GOODWILL AND INTANGIBLE ASSETS (Continued)
The aggregate amortization expense related to amortizable intangible assets was $0.5 million,
$0.7 million and $0.8 million for fiscal years 2010, 2009 and 2008, respectively. The estimated
remaining amortization expense related to amortizable intangible assets for the years ended
January 31, 2011 and 2012 is $55,000 and $13,000, respectively.
6. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
|
|
|
|
|
|
|
|
|
|
|
January 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Accounts receivable, net |
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
64,531 |
|
|
$ |
74,527 |
|
Less allowance for: |
|
|
|
|
|
|
|
|
Doubtful accounts |
|
|
(1,657 |
) |
|
|
(1,305 |
) |
Sales adjustments |
|
|
(1,785 |
) |
|
|
(2,268 |
) |
|
|
|
|
|
|
|
|
|
$ |
61,089 |
|
|
$ |
70,954 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets |
|
|
|
|
|
|
|
|
Deferred cost of revenues |
|
$ |
7,449 |
|
|
$ |
7,099 |
|
Prepaid expenses |
|
|
3,474 |
|
|
|
3,758 |
|
Income tax
receivable |
|
|
1,133 |
|
|
|
2,258 |
|
Other |
|
|
1,624 |
|
|
|
1,677 |
|
|
|
|
|
|
|
|
|
|
$ |
13,680 |
|
|
$ |
14,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
|
|
|
|
|
|
Buildings and building improvements |
|
$ |
32,249 |
|
|
$ |
31,966 |
|
Computer equipment and software |
|
|
26,308 |
|
|
|
29,140 |
|
Furniture and office equipment |
|
|
13,836 |
|
|
|
14,786 |
|
Leasehold improvements |
|
|
5,756 |
|
|
|
5,725 |
|
Land |
|
|
3,850 |
|
|
|
3,850 |
|
Automobiles (including under capital lease) |
|
|
248 |
|
|
|
245 |
|
|
|
|
|
|
|
|
|
|
|
82,247 |
|
|
|
85,712 |
|
Less accumulated depreciation and amortization |
|
|
(45,028 |
) |
|
|
(44,274 |
) |
|
|
|
|
|
|
|
|
|
$ |
37,219 |
|
|
$ |
41,438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
|
|
|
|
|
|
|
Other payables |
|
$ |
4,880 |
|
|
$ |
6,598 |
|
VAT payable |
|
|
3,072 |
|
|
|
3,420 |
|
Accrued book overdraft |
|
|
|
|
|
|
2,476 |
|
|
|
|
|
|
|
|
|
|
$ |
7,952 |
|
|
$ |
12,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue |
|
|
|
|
|
|
|
|
Deferred maintenance revenue |
|
$ |
76,336 |
|
|
$ |
70,621 |
|
Deferred research and development funding |
|
|
3,112 |
|
|
|
1,743 |
|
Deferred license revenue |
|
|
2,932 |
|
|
|
4,641 |
|
Deferred services revenue |
|
|
1,839 |
|
|
|
3,144 |
|
Deferred subscription revenue |
|
|
1,495 |
|
|
|
1,207 |
|
Other deferred revenue |
|
|
31 |
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
$ |
85,745 |
|
|
$ |
81,392 |
|
|
|
|
|
|
|
|
66
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS (Continued)
|
|
|
|
|
|
|
|
|
|
|
January 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Other current liabilities |
|
|
|
|
|
|
|
|
Accrued commissions and bonus |
|
$ |
7,268 |
|
|
$ |
7,781 |
|
Accrued compensated absences |
|
|
6,913 |
|
|
|
7,081 |
|
Accrued professional fees |
|
|
2,394 |
|
|
|
2,884 |
|
Other accrued payroll |
|
|
1,740 |
|
|
|
2,340 |
|
Accrued severance |
|
|
423 |
|
|
|
2,872 |
|
Accrued royalties |
|
|
608 |
|
|
|
940 |
|
Other current liabilities |
|
|
5,489 |
|
|
|
7,183 |
|
|
|
|
|
|
|
|
|
|
$ |
24,835 |
|
|
$ |
31,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
|
|
|
|
|
|
Long-term deferred revenue |
|
$ |
2,985 |
|
|
$ |
191 |
|
Long-term income tax payable |
|
|
2,411 |
|
|
|
2,844 |
|
Other |
|
|
967 |
|
|
|
1,289 |
|
|
|
|
|
|
|
|
|
|
$ |
6,363 |
|
|
$ |
4,324 |
|
|
|
|
|
|
|
|
7. DEBT
|
|
|
|
|
|
|
|
|
|
|
January 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Total debt |
|
|
|
|
|
|
|
|
Note payable |
|
$ |
16,728 |
|
|
$ |
16,983 |
|
Less current maturities |
|
|
(285 |
) |
|
|
(266 |
) |
|
|
|
|
|
|
|
Long-term debt |
|
$ |
16,443 |
|
|
$ |
16,717 |
|
|
|
|
|
|
|
|
The aggregate maturities of the note payable, for each of the next five fiscal years and
thereafter are as follows: $0.3 million in fiscal 2011; $0.3 million in fiscal 2012; $0.3 million
in fiscal 2013; $0.4 million in fiscal 2014 and $15.4 million in fiscal 2015.
Notes Payable
In July 2004, the Company entered into a loan agreement with Mid-State Bank & Trust, a bank
which was subsequently purchased by Rabobank, N.A. The loan had an original principal amount of
$18.0 million and bears interest at a fixed rate of 6.5%. This loan is secured by real property
located in Santa Barbara, California. The terms of the loan provide for the Company to make 119
monthly payments consisting of principal and interest totaling $115,000 and one final principal
payment of $15.4 million. The loan matures in July 2014.
Credit Facility
Effective April 10, 2008, the Company entered into an unsecured loan agreement with Bank of
America N.A. (the Facility). The Facility provides a three-year commitment for a $20 million line
of credit. The Company pays an annual commitment fee of between 0.25% and 0.50% calculated on the
average unused portion of the $20 million Facility. The rate is determined by the ratio of funded
debt to the Companys 12-month trailing EBITDA.
The Facility provided that the Company maintain certain financial and operating covenants
which include, among other provisions, a maximum total leverage ratio of 1.5 to 1.0, a minimum
liquidity ratio of 1.3 to 1.0, a minimum 12-month trailing EBITDA of $10 million and a minimum
fixed charge coverage ratio of 2.00 to 1.00. Borrowings under the Facility bear interest at a
floating rate based on LIBOR or prime plus the corresponding applicable margins, ranging from 0.75%
to 1.75% for the LIBOR option or -0.25% to 0.25% for the prime option, depending on the Companys
funded debt to 12-month trailing EBITDA ratio. At January 31, 2010, a prime rate
borrowing would have had an effective rate of 3.0% and a 30-day LIBOR borrowing would have had an
effective rate of approximately 0.98%.
67
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. DEBT (Continued)
Effective April 10, 2009, the Company executed an amendment to the Facility to amend the
12-month trailing EBITDA and fixed charge ratio covenants for future reporting periods. For the
reporting period beginning February 1, 2009 though the expiration of the Facility, the minimum
12-month trailing EBITDA is reduced to $5 million with the definition of EBITDA amended to exclude
goodwill impairment charges.
As of January 31, 2010 there were no borrowings under the Facility.
8. INCOME TAXES
Income tax expense (benefit) is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended January 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
598 |
|
|
$ |
501 |
|
|
$ |
173 |
|
State |
|
|
658 |
|
|
|
21 |
|
|
|
397 |
|
Foreign |
|
|
1,196 |
|
|
|
3,330 |
|
|
|
2,277 |
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
2,452 |
|
|
|
3,852 |
|
|
|
2,847 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(49 |
) |
|
|
(1,965 |
) |
|
|
(1,059 |
) |
State |
|
|
(829 |
) |
|
|
(440 |
) |
|
|
(1,229 |
) |
Foreign |
|
|
(466 |
) |
|
|
(1,158 |
) |
|
|
(442 |
) |
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
(1,344 |
) |
|
|
(3,563 |
) |
|
|
(2,730 |
) |
Equity |
|
|
|
|
|
|
|
|
|
|
216 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,108 |
|
|
$ |
289 |
|
|
$ |
333 |
|
|
|
|
|
|
|
|
|
|
|
Actual income tax expense (benefit) differs from that obtained by applying the statutory
Federal income tax rate of 34% to income before income taxes as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended January 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Computed expected tax expense |
|
$ |
836 |
|
|
$ |
(7,730 |
) |
|
$ |
1,955 |
|
State income taxes, net of federal income tax expense |
|
|
495 |
|
|
|
(274 |
) |
|
|
(670 |
) |
Incremental tax benefit from foreign operations |
|
|
(1,611 |
) |
|
|
3,130 |
|
|
|
(1,707 |
) |
Non-deductible equity compensation |
|
|
795 |
|
|
|
319 |
|
|
|
371 |
|
Foreign withholding taxes |
|
|
891 |
|
|
|
772 |
|
|
|
1,014 |
|
Net change in valuation allowance |
|
|
(679 |
) |
|
|
(3,154 |
) |
|
|
(155 |
) |
Net change in contingency reserve |
|
|
(433 |
) |
|
|
499 |
|
|
|
(64 |
) |
Non-deductible expenses |
|
|
79 |
|
|
|
527 |
|
|
|
422 |
|
Benefit of tax credits |
|
|
(393 |
) |
|
|
(361 |
) |
|
|
(438 |
) |
Subpart F Income |
|
|
312 |
|
|
|
557 |
|
|
|
24 |
|
Non-deductible goodwill impairment |
|
|
|
|
|
|
2,100 |
|
|
|
|
|
Rate change impact |
|
|
(9 |
) |
|
|
2,635 |
|
|
|
(94 |
) |
Dividend income |
|
|
848 |
|
|
|
|
|
|
|
|
|
Other |
|
|
(23 |
) |
|
|
1,269 |
|
|
|
(325 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,108 |
|
|
$ |
289 |
|
|
$ |
333 |
|
|
|
|
|
|
|
|
|
|
|
68
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. INCOME TAXES (Continued)
Consolidated U.S. book loss before income taxes was $(2.6) million, $(9.8) million, and $(0.8)
million for the fiscal years ended January 31, 2010, 2009 and 2008, respectively. The corresponding
book income (loss) before
income taxes for foreign operations was $5.1 million, $(13.6) million, and $6.5 million for the
fiscal years ended January 31, 2010, 2009 and 2008, respectively.
The Company files U.S. federal, state, and foreign tax returns that are subject to audit by
various tax authorities. The Company is currently under audit in India for fiscal years ended
March 31, 1998, 1999, 2006 and 2008, in California for fiscal year ended 2004, and in Tennessee for
fiscal years ended 2004 through 2007.
U.S. income and foreign withholding taxes have not been recorded on permanently reinvested
earnings of the Companys foreign subsidiaries aggregating approximately $37.5 million at January
31, 2010. Such earnings would become taxable upon the sale or liquidation of these subsidiaries or
upon the remittance of dividends. To the extent that the earnings of our foreign subsidiaries are
not treated as permanently reinvested, which include earnings of certain countries, we have
considered the impact in our tax provision.
Deferred income taxes reflect the net effects of the temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Companys deferred tax assets and
liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
January 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Allowance for doubtful accounts and sales adjustments |
|
$ |
1,157 |
|
|
$ |
1,092 |
|
Accrued vacation |
|
|
1,659 |
|
|
|
1,747 |
|
Accrued commissions |
|
|
433 |
|
|
|
662 |
|
Alternative minimum tax (AMT) credits |
|
|
784 |
|
|
|
784 |
|
Research and development credits |
|
|
8,917 |
|
|
|
7,999 |
|
Foreign tax credits |
|
|
209 |
|
|
|
209 |
|
Deferred revenue |
|
|
2,723 |
|
|
|
3,071 |
|
Depreciation and amortization |
|
|
694 |
|
|
|
140 |
|
Net operating loss carry forwards |
|
|
15,259 |
|
|
|
16,052 |
|
Intangibles |
|
|
598 |
|
|
|
156 |
|
Accrued expenses other |
|
|
677 |
|
|
|
629 |
|
Section 263(a) interest capitalization |
|
|
438 |
|
|
|
452 |
|
Stock compensation |
|
|
5,095 |
|
|
|
4,880 |
|
Other |
|
|
772 |
|
|
|
476 |
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
39,415 |
|
|
|
38,349 |
|
Less valuation allowance |
|
|
(9,590 |
) |
|
|
(10,590 |
) |
|
|
|
|
|
|
|
Deferred tax assets, net of valuation allowance |
|
$ |
29,825 |
|
|
$ |
27,759 |
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Capitalized software development costs |
|
$ |
573 |
|
|
$ |
924 |
|
State income taxes |
|
|
2,775 |
|
|
|
2,681 |
|
Unrecognized capital gain |
|
|
1,016 |
|
|
|
1,021 |
|
Unrecognized gain/loss on translation |
|
|
261 |
|
|
|
601 |
|
Other comprehensive income |
|
|
2,141 |
|
|
|
1,545 |
|
Other |
|
|
100 |
|
|
|
396 |
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
6,866 |
|
|
|
7,168 |
|
|
|
|
|
|
|
|
Total net deferred tax asset |
|
$ |
22,959 |
|
|
$ |
20,591 |
|
|
|
|
|
|
|
|
Current portion of deferred tax asset, net |
|
|
3,548 |
|
|
|
4,372 |
|
Non-current portion of deferred tax asset, net |
|
|
19,411 |
|
|
|
16,219 |
|
|
|
|
|
|
|
|
Total net deferred tax asset |
|
$ |
22,959 |
|
|
$ |
20,591 |
|
|
|
|
|
|
|
|
69
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. INCOME TAXES (Continued)
The Company reviews its net deferred tax assets by jurisdiction on a quarterly basis to
determine whether a valuation allowance is necessary based on the more-likely-than-not standard. At
January 31, 2010 and 2009, the valuation allowance attributable to deferred tax assets was $9.6
million and $10.6 million, respectively.
Deferred tax assets at January 31, 2010 and 2009 do not include $1.6 million and $1.5 million,
respectively, of excess tax benefits from employee stock exercises. Equity will be increased by
$1.6 million when such excess tax benefits are ultimately realized.
As
of January 31, 2010, the Company has federal, state and foreign net operating loss carryforwards of $60.8 million
and federal state and deferred tax credit carryforwards of
$9.9 million. The
majority of the Companys net operating loss carryforwards do not expire, the remaining begin to
expire in fiscal 2012. The majority of the Companys tax credit carryforwards do not expire, the
remaining begin to expire in fiscal 2016.
During the fiscal year ended January 31, 2010, the Company decreased its reserves for
uncertain tax positions by $0.4 million. Interest and penalties on accrued but unpaid taxes are
classified in the Consolidated Statements of Operations as income tax expense. The liability for
unrecognized tax benefits is classified as long-term in the Companys Consolidated Balance Sheets.
The following table reconciles the gross amounts of unrecognized tax benefits at the beginning
and end of the period:
|
|
|
|
|
|
|
|
|
|
|
Years Ended January 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Unrecognized tax benefits at beginning of the year |
|
$ |
2,844 |
|
|
$ |
2,345 |
|
Increases as a result of tax positions taken in a prior period |
|
|
29 |
|
|
|
499 |
|
Decreases as a result of tax positions taken in a prior period |
|
|
(12 |
) |
|
|
|
|
Decreases as a result of a tax settlement |
|
|
(450 |
) |
|
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefit at end of year |
|
$ |
2,411 |
|
|
$ |
2,844 |
|
|
|
|
|
|
|
|
All of the unrecognized tax benefits included in the balance sheet as of January 31, 2010
would impact the effective tax rate on income from continuing operations, if recognized.
The total amount of interest expense recognized in the Consolidated Statements of Operations
for unpaid taxes is immaterial for the year ended January 31,
2010. The total amount of accrued interest
and penalties in the Consolidated Balance Sheet as of
January 31, 2010 was $0.2 million.
Due to potential settlements with tax authorities in the next twelve months related to tax
credits, an estimated $0.2 million of gross unrecognized tax benefits may be recognized during the
next twelve month period.
70
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. INCOME TAXES (Continued)
The Company files U.S. federal, state, and foreign income tax returns in jurisdictions with
varying statute of limitations. The years that may be subject to examination will vary by
jurisdiction. Below is a list of our material jurisdictions and the years open for audit as of
January 31, 2010:
|
|
|
|
|
Jurisdiction |
|
Years Open for Audit |
|
U.S. Federal |
|
FY07 and beyond |
California |
|
FY06 and beyond |
Michigan |
|
FY06 and beyond |
New Jersey |
|
FY06 and beyond |
Texas |
|
FY05 and beyond |
Australia |
|
FY06 and beyond |
France |
|
FY09 and beyond |
Germany |
|
FY06 and beyond |
Ireland |
|
FY06 and beyond |
Netherlands |
|
FY05 and beyond |
United Kingdom |
|
FY08 and beyond |
9. STOCKHOLDERS EQUITY
Dividends
In fiscal 2010, the Company modified its dividend program to give investors the choice of a
stock dividend or by election a cash dividend payment. Previously all dividends were payable in
cash.
On May 6, 2009, the Companys Board of Directors declared a quarterly dividend of $0.025 per
share of common stock payable on July 3, 2009 to shareholders of record at the close of business on
June 2, 2009. The dividend was payable in either cash or shares of the Companys common stock, at
the election of each shareholder. Based on the shareholder election, the Company paid $0.2 million
in cash and issued 180,000 shares.
On June 11, 2009, the Companys Board of Directors declared a quarterly dividend of $0.025 per
share of common stock payable on October 8, 2009 to shareholders of record at the close of business
on August 28, 2009. The dividend was payable in either cash or shares of the Companys common
stock, at the election of each shareholder. Based on the shareholder election, the Company paid
$0.2 million in cash and issued 118,000 shares.
On September 24, 2009, the Companys Board of Directors declared a quarterly dividend of
$0.025 per share of common stock payable on January 11, 2010 to shareholders of record at the close
of business on December 1, 2009. The dividend was payable in either cash or shares of the Companys
common stock, at the election of each shareholder. Based on the shareholder election, the Company
paid $0.6 million in cash and issued 23,000 shares.
On January 13, 2010, the Companys Board of Directors declared a quarterly dividend of $0.025
per share of common stock payable on April 26, 2010 to shareholders of record at the close of
business on March 16, 2010. QAD will pay its quarterly dividend in either cash or shares of the
Companys common stock, at the election of each shareholder.
Stock Repurchase Activity
In fiscal 2010, the Company did not make any stock repurchases, and as of January 31, 2010,
the Company does not have a stock repurchase program in place.
71
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. STOCKHOLDERS EQUITY(Continued)
In fiscal 2009, the Company repurchased 0.3 million shares of the Companys common stock for
$8.42 per share for total cash consideration of $2.2 million including fees. The shares were
repurchased as part of the stock repurchase program approved by the Companys Board of Directors in
September 2007.
In fiscal 2008, the Company repurchased approximately 2.2 million shares at an average price
of $8.37 per share, including fees, for total consideration of $18.7 million. Of the 2.2 million
shares repurchased in fiscal 2008, one million shares were repurchased in a single privately
negotiated transaction.
10. STOCK-BASED COMPENSATION
Stock Plans
On June 7, 2006, the shareholders approved the QAD Inc. 2006 Stock Incentive Program (2006
Program). The 2006 Program replaces the QAD 1997 Stock Incentive Program (1997 Program).
Concurrently, the shareholders authorized a maximum of 5.3 million shares to be issued under the
2006 Program 4 million newly authorized shares and 1.3 million shares previously authorized for
use in the 1997 Program. On June 10, 2009 the shareholders approved an amendment to the 2006
Program to increase the number of shares available for issuance from 5.3 million shares to 8.3
million shares. The 2006 Program allows for incentive stock options, non-statutory stock options,
restricted shares, rights to purchase stock, stock appreciation rights (SARs) and other stock
rights. As of January 31, 2010, 3.8 million shares were available for issuance.
After the 2006 Program was adopted, the Company began issuing the majority of equity awards in
the form of stock-settled SARs. A SAR is a contractual right to receive value tied to the
post-grant appreciation of the underlying stock. Although the Company has the ability to grant
stock-settled or cash-settled SARs, the Company has only granted stock-settled SARs. Upon vesting,
a holder of a stock-settled SAR receives shares in the Companys common stock equal to the
intrinsic value of the SAR at time of exercise. Economically, a stock-settled SAR provides the same
compensation value as a stock option, but the employee is not required to pay an exercise price
upon exercise of the SAR. Stock compensation expense, as required under SFAS 123R, is the same for
stock-settled SARs and stock options. The Company also issues restricted stock units (RSUs)
beginning in the second quarter of fiscal 2008.
At January 31, 2010, there were 1.2 million non-statutory stock options outstanding under the
1997 Program. Effective with the adoption of the 2006 Program, no further awards were granted using
the 1997 Program. Under the 1997 Program and the 2006 Program, non-statutory stock options and SARs
(equity awards) have generally been granted for a term of eight years and equity awards granted to
employees generally vest 25% after each year of service for four years and are contingent upon
employment with the Company on the vesting date. RSUs granted to employees under the 2006 Program
are generally released 25% after each year of service for four years and are contingent upon
employment with the Company on the release date. Under the 2006 Program and 1997 Program,
non-statutory stock options, SARs and RSUs to non-employee directors generally vest over three or
four years and are contingent upon providing services to the Company.
Under both programs, officers, directors, employees, consultants and other independent
contractors or agents of the Company or subsidiaries of the Company who are responsible for or
contribute to the management, growth or profitability of its business are eligible for selection by
the program administrators to participate. However, incentive stock options granted under the
programs may only be granted to a person who is an employee of the Company or one of its
subsidiaries.
72
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. STOCK-BASED COMPENSATION (Continued)
On August 12, 2009, the Company completed a one-time Stock Option and Stock Appreciation Right
Exchange Program (the Program). Pursuant to the terms of the Program, eligible participants were
able to exchange outstanding stock options and SARs granted under QADs 1997 and 2006 Stock
Incentive Programs for a reduced number of new SARs. The stock options and SARs that were eligible
for the Program had a per share exercise price
above the fair market value of QAD common stock as of the first business day following the close of
the exchange offer period. The eligible stock options and SARs were exchanged for a reduced number
of SARs based on predefined exchange ratios. The new SARs were issued at a per share exercise price
equal to the fair market value of the Companys common stock on August 13, 2009, the date of
issuance.
Stock options and SARs to purchase 3,378,161 shares of the Companys common stock were
tendered and accepted in the exchange offer, which expired August 12, 2009. These surrendered
equity awards represent 79% of the total shares subject to equity awards eligible for exchange in
the exchange offer at the beginning of the offer period or 85% of the total shares subject to
equity awards eligible for exchange in the exchange offer at the close of the offer period. The
surrendered equity awards were cancelled as of August 13, 2009. In exchange for these surrendered
equity awards, the Company issued 1,539,372 new SARs at an exercise price of $3.91 (New SARs). A
total of 685,119 shares were returned to the pool of shares available for issuance. The Company did
not incur any incremental stock-based compensation expense nor will it incur any incremental
stock-based compensation expense in the future as a result of the Program.
The exchange ratios (the Exchange Ratios) under the Program were determined at the
commencement of the exchange period. The Exchange Ratios were intended to result in the issuance of
New SARs with a fair value approximately equal to the fair value of the eligible stock options and
SARs surrendered. The Black-Scholes valuation model was used to determine the fair value of the
eligible stock options and SARs and the New SARs for purposes of determining the Exchange Ratios.
Because the closing price of the Companys common stock increased over the course of the exchange
period, the Exchange Ratios resulted in the issuance of New SARs with a fair value less than the
fair value of the surrendered stock options and SARs. For purposes of the Black-Scholes valuation
model, the expected life of the surrendered stock options and SARs was estimated to be the full
remaining contractual term. The risk-free interest rate was based on the U.S. Treasury yield for a
term consistent with the expected life. The volatility was based on the historical volatility of
the Companys common stock for a period equal to the expected life. The dividend rate was based on
the assumption of paying quarterly dividends at the same historical rate.
Stock- Based Compensation
The following table sets forth reported stock compensation expense included in the Companys
Consolidated Statements of Operations for the years ended January 31, 2010, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended January 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Stock-based compensation expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of maintenance, service and other revenue |
|
$ |
806 |
|
|
$ |
1,042 |
|
|
$ |
1,104 |
|
Sales and marketing |
|
|
829 |
|
|
|
1,330 |
|
|
|
1,458 |
|
Research and development |
|
|
622 |
|
|
|
740 |
|
|
|
861 |
|
General and administrative |
|
|
2,335 |
|
|
|
2,404 |
|
|
|
2,783 |
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense |
|
$ |
4,592 |
|
|
$ |
5,516 |
|
|
$ |
6,206 |
|
|
|
|
|
|
|
|
|
|
|
The Company presents any benefits of realized tax deductions in excess of recognized
compensation expense as cash flow from financing activities in the accompanying Consolidated
Statement of Cash Flows. There were zero, $0.1 million and $0.2 million excess tax benefits
recorded for equity awards exercised in the years ended January 31, 2010, 2009 and 2008,
respectively.
73
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. STOCK-BASED COMPENSATION (Continued)
Option/SAR Information
The weighted average assumptions used to value SARs are shown in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended January 31, |
|
|
|
2010 (5) |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected life in years (1) |
|
|
5.17 |
|
|
|
5.25 |
|
|
|
5.25 |
|
Risk free interest rate (2) |
|
|
2.06 |
% |
|
|
3.20 |
% |
|
|
4.58 |
% |
Volatility (3) |
|
|
66 |
% |
|
|
50 |
% |
|
|
59 |
% |
Dividend rate (4) |
|
|
2.40 |
% |
|
|
1.37 |
% |
|
|
1.05 |
% |
|
|
|
(1) |
|
Except for the New SARs that were issued as a result of the Program, the expected life
of SARs granted under the stock plans is based on historical exercise patterns, which the
Company believes are representative of future behavior. The expected life of the New SARs
was estimated to be the full remaining contractual term. Excluding the effect of the New
SARs granted as a result of the Program, the weighted average expected life in years was
4.78. |
|
(2) |
|
The risk-free interest rate is based on the U.S. Treasury yield for a term consistent
with the expected life of SARs in effect at the time of grant. Excluding the effect of the
New SARs granted as a result of the Program, the weighted average risk free rate was 1.17%. |
|
(3) |
|
The Company estimates the volatility of its common stock at the date of grant based on
the historical volatility of the Companys common stock, which it believes is
representative of the expected volatility over the expected life of SARs. Excluding the
effect of the New SARs granted as a result of the Program, the weighted average volatility
was 69%. |
|
(4) |
|
The Company expects to continue paying quarterly dividends at the same rate as it has
over the last year. Excluding the effect of the New SARs granted as a result of the
Program, the weighted average dividend rate was 2.16%. |
|
(5) |
|
The valuation of the New SARs granted as a result of the Program are included in the
calculations above. |
74
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. STOCK-BASED COMPENSATION (Continued)
The following table summarizes the activity for outstanding options and SARs for the fiscal
years ended January 31, 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Options/ |
|
|
Exercise |
|
|
Remaining |
|
|
Aggregate |
|
|
|
SARs |
|
|
Price per |
|
|
Contractual |
|
|
Intrinsic Value |
|
|
|
(in thousands) |
|
|
Share |
|
|
Term (years) |
|
|
(in thousands) |
|
Outstanding at January 31, 2007 |
|
|
5,634 |
|
|
$ |
7.38 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,141 |
|
|
|
9.14 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(709 |
) |
|
|
4.26 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
(179 |
) |
|
|
11.10 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(259 |
) |
|
|
8.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 31, 2008 |
|
|
5,628 |
|
|
$ |
7.98 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,229 |
|
|
|
7.43 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(193 |
) |
|
|
3.17 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
(338 |
) |
|
|
8.38 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(359 |
) |
|
|
8.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 31, 2009 |
|
|
5,967 |
|
|
$ |
7.99 |
|
|
|
|
|
|
|
|
|
Granted (1) |
|
|
2,586 |
|
|
|
4.26 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(91 |
) |
|
|
2.98 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
(344 |
) |
|
|
7.80 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(314 |
) |
|
|
6.94 |
|
|
|
|
|
|
|
|
|
Cancelled (2) |
|
|
(3,378 |
) |
|
|
8.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 31, 2010 |
|
|
4,426 |
|
|
$ |
5.88 |
|
|
|
4.9 |
|
|
$ |
3,586 |
|
Vested and expected to vest at
January 31, 2010 (3) |
|
|
4,103 |
|
|
$ |
5.98 |
|
|
|
4.8 |
|
|
$ |
3,259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at January 31, 2010 |
|
|
1,632 |
|
|
$ |
8.03 |
|
|
|
3.1 |
|
|
$ |
525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As a result of the Program a total of 1,539,372 SARs were granted during the third quarter
of fiscal 2010 with an exercise price of $3.91. |
|
(2) |
|
Options and SARs cancelled during the third quarter of fiscal 2010 as a part of the Program. |
|
(3) |
|
The expected-to-vest options and SARs are the result of applying the pre-vesting forfeiture
rate assumptions to total outstanding options and SARs. |
The aggregate intrinsic value in the table above represents the total pretax intrinsic value
(the aggregate difference between the closing stock price of the Companys common stock on January
31, 2010 and the exercise price for in-the-money options) that would have been received by the
option holders if all options and SARs had been exercised on January 31, 2010. The total intrinsic
value of options and SARs exercised in the years ended January 31, 2010, 2009 and 2008 was $0.2
million, $0.6 million and $3.3 million respectively. The weighted average grant date fair value per
share of SARs granted in the years ended January 31, 2010, 2009 and 2008 was $2.71, $3.17 and
$4.65, respectively. Excluding the effect of the New SARs granted as a result of the Program, the
weighted average grant date fair value per share of SARs granted in the year ended January 31, 2010
was $2.31.
Net cash received from option and SARs exercises for the years ended January 31, 2010, 2009
and 2008 was $0.3 million, $0.6 million and $2.9 million, respectively.
At January 31, 2010, there was approximately $5.2 million of total unrecognized compensation
cost related to unvested stock options and unvested SARs. This cost is expected to be recognized
over a weighted average period of approximately 1.4 years.
RSU Information
The estimated fair value of the RSUs was calculated based on the market price of the Companys
common stock on the date of grant, reduced by the present value of dividends foregone during the
vesting period.
75
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. STOCK-BASED COMPENSATION (Continued)
The following table summarizes the activity for RSUs for the fiscal years ended January 31,
2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant Date |
|
|
|
RSUs |
|
|
Fair Value |
|
|
|
(in thousands) |
|
|
|
|
|
|
Restricted stock at January 31, 2007 |
|
|
|
|
|
$ |
|
|
Granted |
|
|
334 |
|
|
|
8.17 |
|
|
|
|
|
|
|
|
|
Restricted stock at January 31, 2008 |
|
|
334 |
|
|
$ |
8.17 |
|
Granted |
|
|
564 |
|
|
|
5.75 |
|
Released (1) |
|
|
(83 |
) |
|
|
8.30 |
|
Forfeited |
|
|
(68 |
) |
|
|
7.49 |
|
|
|
|
|
|
|
|
|
Restricted stock at January 31, 2009 |
|
|
747 |
|
|
$ |
6.39 |
|
Granted |
|
|
415 |
|
|
|
4.20 |
|
Released (1) |
|
|
(203 |
) |
|
|
6.65 |
|
Forfeited |
|
|
(9 |
) |
|
|
6.74 |
|
|
|
|
|
|
|
|
|
Restricted stock at January 31, 2010 |
|
|
950 |
|
|
$ |
5.37 |
|
|
|
|
|
|
|
|
|
Restricted stock expected to vest as of January 31, 2010 (2) |
|
|
916 |
|
|
$ |
5.57 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The number of RSUs released includes shares withheld on behalf of employees to satisfy
statutory tax withholding requirements. |
|
(2) |
|
RSUs expected to vest are RSUs expected to be released net of estimated future forfeitures. |
The fair value of RSUs that were released in the years ended January 31, 2010 and 2009 was
$1.3 million and $0.7 million, respectively. No RSUs were released in the year ended January 31,
2008. The weighted average grant date fair value per share of RSUs granted in the years ended
January 31, 2010, 2009 and 2008 was $4.20, $5.75 and $8.17, respectively.
Total unrecognized compensation cost related to RSUs and restricted stock awards was
approximately $4.3 million as of January 31, 2010. This cost is expected to be recognized over a
period of approximately 2.6 years.
11. RESTRUCTURING CHARGES
As a result of the global economic downturn, which began in the fourth quarter of fiscal 2009
and has continued into fiscal 2010, QAD has experienced a significant decline in product and
services sales. In response to the difficult economic environment, the Company took steps to reduce
its headcount and lower expenses beginning in the fourth quarter of fiscal 2009 and again in the
second and third quarters of fiscal 2010. Related to these restructuring initiatives the Company
has incurred costs related to employee severance and benefits of $6.5 million and a total of
approximately 260 full-time positions have been eliminated, which was approximately 15% of the
workforce. Severance charges of $3.4 million were incurred in the fourth quarter of fiscal 2009 and
the Company has incurred an additional $3.1 million in severance charges during fiscal 2010. Below
is a detailed description of the restructuring charges and accruals by plan.
76
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. RESTRUCTURING CHARGES (Continued)
Restructuring charges included in the Companys Consolidated Statements of Operations for the
fiscal years ended January 31, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended January 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Cost of maintenance, services and other revenue |
|
$ |
1,054 |
|
|
$ |
854 |
|
Sales and marketing |
|
|
1,113 |
|
|
|
1,607 |
|
Research and development |
|
|
633 |
|
|
|
590 |
|
General and administrative |
|
|
316 |
|
|
|
300 |
|
|
|
|
|
|
|
|
Total restructuring charges |
|
$ |
3,116 |
|
|
$ |
3,351 |
|
|
|
|
|
|
|
|
Fourth Quarter Fiscal 2009 Restructuring Plan
In the fourth quarter of fiscal 2009, the Company initiated a restructuring program in order
to reduce operating costs. This program reduced the number of employees by approximately 145
full-time positions globally. In connection with this restructuring plan, the Company recorded
restructuring charges totaling $3.4 million related to one-time termination benefits for the
elimination of approximately 110 of these full-time positions during the fourth quarter of fiscal
2009. During fiscal 2010, an additional $0.8 million of severance expense was recognized related to
one-time termination benefits for the elimination of the remaining 15 employees identified in Q4
fiscal 2009 and an additional 20 employees identified in Q1 fiscal 2010. Related to this
restructuring plan, the Company paid $0.5 million in the fourth quarter of fiscal 2009 and $3.5
million in fiscal 2010. During fiscal 2010, the Company adjusted the original fourth quarter fiscal
2009 restructuring accrual by $0.1 million. As of January 31, 2010, there was approximately $0.1
million accrued related to one employee whose severance agreement was settled in February 2010. The
Company expects to make the remaining payment in the first quarter fiscal 2011.
Second Quarter Fiscal 2010 Restructuring Plan
In May 2009, the Company took further cost cutting actions which resulted in additional
severance expense of approximately $1.5 million in the second quarter of fiscal 2010. The number of
employees was reduced by approximately 80 full-time positions. During fiscal 2010, a total of $1.5
million was paid related to the plan. As of January 31, 2010, the plan was complete.
Third Quarter Fiscal 2010 Restructuring Plan
During the third quarter of fiscal 2010, the Company reduced further the number of employees
by approximately 35 full-time positions and recorded $0.9 million restructuring charges related to
severance and related expenses. During fiscal 2010, the Company paid $0.9 million related to
the third quarter fiscal 2010 plan. As of January 31, 2010, the plan was substantially complete.
77
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. RESTRUCTURING CHARGES (Continued)
Restructuring Accruals
The activity in the Companys restructuring accrual for fiscal years ended January 31, 2010
and 2009 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q4 Fiscal 2009 |
|
|
Q2 Fiscal 2010 |
|
|
Q3 Fiscal 2010 |
|
|
|
|
|
|
Restructuring |
|
|
Restructuring |
|
|
Restructuring |
|
|
|
|
|
|
Plan |
|
|
Plan |
|
|
Plan |
|
|
Total |
|
|
|
(in thousands) |
|
Balance as of January 31, 2008 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Employee severance pay and related expenses |
|
|
3,351 |
|
|
|
|
|
|
|
|
|
|
|
3,351 |
|
Cash paid |
|
|
(479 |
) |
|
|
|
|
|
|
|
|
|
|
(479 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 31, 2009 |
|
$ |
2,872 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,872 |
|
Employee severance pay and related expenses |
|
|
819 |
|
|
|
1,496 |
|
|
|
927 |
|
|
|
3,242 |
|
Cash paid |
|
|
(3,526 |
) |
|
|
(1,456 |
) |
|
|
(930 |
) |
|
|
(5,912 |
) |
(Reversal of) adjustment to previous charges |
|
|
(92 |
) |
|
|
(43 |
) |
|
|
9 |
|
|
|
(126 |
) |
Impact of foreign currency translation |
|
|
24 |
|
|
|
3 |
|
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 31, 2010 |
|
$ |
97 |
|
|
$ |
|
|
|
$ |
6 |
|
|
$ |
103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution 401(k) plan which is available to U.S. employees after
30 days of employment. Employees may contribute up to the maximum allowable by the Internal Revenue
Code. The Company voluntarily matches 75% of the employees contributions up to the first four
percent of the employees eligible contribution. In addition, the Company can make additional
contributions at the discretion of the board of directors. Participants are immediately vested in
their employee contributions. Employer contributions vest over a five-year period. The Companys
contributions for fiscal years 2010, 2009 and 2008 were $1.2 million, $1.3 million and $1.2
million, respectively.
Various QAD foreign subsidiaries also contribute to what can be considered defined
contribution pension plans. Employer contributions in these plans are generally based on employee
salary and range from 3% to 22%. These plans are funded at various times throughout the year
according to plan provisions, with aggregate employer contributions of $3.5 million, $3.8 million
and $2.7 million during fiscal years 2010, 2009 and 2008, respectively.
13. COMMITMENTS AND CONTINGENCIES
Lease Obligations
The Company leases certain office facilities, office equipment and automobiles under operating
lease agreements. The leases generally provide that QAD pays taxes, insurance and maintenance
expenses related to the leased assets. Total rent expense for fiscal years 2010, 2009 and 2008 was
$7.5 million, $8.5 million and $7.8 million, respectively. Future minimum rental payments under
non-cancelable operating lease commitments with terms of more than one year as of January 31, 2010
are as follows (in millions):
|
|
|
|
|
2011 |
|
$ |
7.8 |
|
2012 |
|
|
5.3 |
|
2013 |
|
|
2.8 |
|
2014 |
|
|
1.2 |
|
2015 |
|
|
0.6 |
|
Thereafter |
|
|
1.5 |
|
|
|
|
|
|
|
|
19.2 |
|
Less sublease income |
|
|
(0.6 |
) |
|
|
|
|
|
|
$ |
18.6 |
|
|
|
|
|
78
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. COMMITMENTS AND CONTINGENCIES (Continued)
Exit Costs
The Company has been subleasing office space in Carpinteria, California related to the
facilities vacated in fiscal 2005 when QAD moved to its new headquarters in Santa Barbara,
California. This sublease activity resulted in exit costs, primarily due to declines in fair market
value of estimated sublease income, of $0.2 million, $0.4 million and $0.1 million for fiscal years
2010, 2009 and 2008, respectively.
Indemnifications
The Company sells software licenses and services to its customers under written agreements.
Each agreement contains the relevant terms of the contractual arrangement with the customer, and
generally includes certain provisions for indemnifying the customer against losses, expenses and
liabilities from damages that may be awarded against the customer in the event the Companys
software is found to infringe upon certain intellectual property rights of a third party. The
agreement generally limits the scope of and remedies for such indemnification obligations in a
variety of industry-standard respects, including, but not limited to, certain time-based
limitations and a right to replace an infringing product.
The Company believes its internal development processes and other policies and practices limit
its exposure related to the indemnification provisions of the agreements. For several reasons,
including the lack of prior indemnification claims and the lack of a monetary liability limit for
certain infringement cases under the agreements, the Company cannot determine the maximum amount of
potential future payments, if any, related to such indemnification provisions.
Legal Actions
The Company is subject to various legal proceedings and claims, either asserted or unasserted,
which arise in the ordinary course of business. While the outcome of these claims cannot be
predicted with certainty, management does not believe that the outcome of any of these legal
matters will have a material adverse effect on the Companys consolidated results of operations,
financial position or liquidity.
14. BUSINESS SEGMENT INFORMATION
The Company markets its products and services worldwide, primarily to companies in the
manufacturing industry, including automotive, industrial, high technology, food and beverage,
consumer products and life sciences. The Company sells and licenses its products through its
direct sales force in four geographic regions: North America, EMEA, Asia Pacific and Latin America
and through distributors where third parties can extend sales reach more effectively or
efficiently. The North America region includes the United States and Canada. The EMEA region
includes Europe, the Middle East and Africa. The Asia Pacific region includes Asia and Australia.
The Latin America region includes South America, Central America and Mexico. Corporate is a cost
center providing research and development activities and other support functions primarily in the
general and administrative and marketing areas. The Companys Chief Operating Decision Maker
(CODM), the Chief Executive Officer, reviews the consolidated results within one operating segment.
In making operating decisions, the Companys CODM primarily considers consolidated financial
information accompanied by disaggregated information by geographic region.
License revenue is assigned to the geographic regions based on the proportion of commissions
earned by each region. Maintenance revenue is allocated to the region where the end user customer
is located. Services revenue is assigned based on the region where the services are performed.
79
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. BUSINESS SEGMENT INFORMATION (Continued)
Operating income (loss) attributable to each geographic region and Corporate is based on
managements assignment of revenue and costs. Regional cost of revenue includes the cost of goods
produced by the Companys manufacturing operations at the price charged to the distribution operation. Income from
manufacturing operations and costs of research and development are included in the Corporate
operating segment.
Property and equipment, net and capital expenditures are assigned by geographic region based
on the location of each legal entity. This is in contrast to depreciation and amortization expense,
which is allocated both to Corporate and the geographic regions based on managements assignment of
costs. As the Companys headquarters are located in the United States, a significant amount of
Corporate property and equipment are assigned to the North America region.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended January 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
North America (1) |
|
$ |
92,597 |
|
|
$ |
114,447 |
|
|
$ |
115,924 |
|
EMEA |
|
|
67,847 |
|
|
|
83,567 |
|
|
|
82,551 |
|
Asia Pacific |
|
|
40,248 |
|
|
|
46,140 |
|
|
|
45,977 |
|
Latin America |
|
|
14,539 |
|
|
|
18,589 |
|
|
|
18,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
215,231 |
|
|
$ |
262,743 |
|
|
$ |
262,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
12,167 |
|
|
$ |
10,308 |
|
|
$ |
17,011 |
|
EMEA |
|
|
369 |
|
|
|
(18,221 |
) |
|
|
2,592 |
|
Asia Pacific |
|
|
2,053 |
|
|
|
2,658 |
|
|
|
2,714 |
|
Latin America |
|
|
575 |
|
|
|
(229 |
) |
|
|
295 |
|
Corporate |
|
|
(12,293 |
) |
|
|
(18,379 |
) |
|
|
(17,024 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,871 |
|
|
$ |
(23,863 |
) |
|
$ |
5,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
676 |
|
|
$ |
569 |
|
|
$ |
574 |
|
EMEA |
|
|
761 |
|
|
|
963 |
|
|
|
1,081 |
|
Asia Pacific |
|
|
610 |
|
|
|
373 |
|
|
|
521 |
|
Latin America |
|
|
214 |
|
|
|
237 |
|
|
|
201 |
|
Corporate |
|
|
7,731 |
|
|
|
8,992 |
|
|
|
7,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,992 |
|
|
$ |
11,134 |
|
|
$ |
9,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures: |
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
441 |
|
|
$ |
3,608 |
|
|
$ |
3,377 |
|
EMEA |
|
|
254 |
|
|
|
971 |
|
|
|
1,141 |
|
Asia Pacific |
|
|
262 |
|
|
|
1,504 |
|
|
|
396 |
|
Latin America |
|
|
6 |
|
|
|
255 |
|
|
|
251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
963 |
|
|
$ |
6,338 |
|
|
$ |
5,165 |
|
|
|
|
|
|
|
|
|
|
|
80
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. BUSINESS SEGMENT INFORMATION (Continued)
|
|
|
|
|
|
|
|
|
|
|
January 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Property and equipment, net: |
|
|
|
|
|
|
|
|
North America |
|
$ |
31,257 |
|
|
$ |
34,580 |
|
EMEA |
|
|
4,470 |
|
|
|
4,731 |
|
Asia Pacific |
|
|
1,217 |
|
|
|
1,704 |
|
Latin America |
|
|
275 |
|
|
|
423 |
|
|
|
|
|
|
|
|
|
|
$ |
37,219 |
|
|
$ |
41,438 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
North America revenue includes sales into Canada, which accounted for 4% of total revenue in
fiscal years 2010, 2009 and 2008. |
15. QUARTERLY INFORMATION (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
April 30 |
|
|
July 31 |
|
|
Oct. 31 |
|
|
Jan. 31(1) |
|
|
|
(in thousands, except per share data) |
|
Fiscal 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
54,998 |
|
|
$ |
51,310 |
|
|
$ |
56,240 |
|
|
$ |
52,683 |
|
Total costs and expenses |
|
|
57,540 |
|
|
|
53,430 |
|
|
|
50,600 |
|
|
|
50,790 |
|
Operating (loss) income |
|
|
(2,542 |
) |
|
|
(2,120 |
) |
|
|
5,640 |
|
|
|
1,893 |
|
Net (loss) income |
|
|
(2,665 |
) |
|
|
(1,425 |
) |
|
|
4,754 |
|
|
|
685 |
|
Basic net (loss) income per share |
|
$ |
(0.09 |
) |
|
$ |
(0.05 |
) |
|
$ |
0.15 |
|
|
$ |
0.02 |
|
Diluted net (loss) income per share |
|
|
(0.09 |
) |
|
|
(0.05 |
) |
|
|
0.15 |
|
|
|
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
66,838 |
|
|
$ |
69,513 |
|
|
$ |
67,767 |
|
|
$ |
58,625 |
|
Total costs and expenses |
|
|
67,801 |
|
|
|
72,415 |
|
|
|
68,300 |
|
|
|
78,090 |
|
Operating loss |
|
|
(963 |
) |
|
|
(2,902 |
) |
|
|
(533 |
) |
|
|
(19,465 |
) |
Net loss |
|
|
(730 |
) |
|
|
(1,433 |
) |
|
|
(1,821 |
) |
|
|
(19,736 |
) |
Basic net loss per share |
|
$ |
(0.02 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.64 |
) |
Diluted net loss per share |
|
|
(0.02 |
) |
|
|
(0.05 |
) |
|
|
(0.06 |
) |
|
|
(0.64 |
) |
|
|
|
(1) |
|
The results for the quarter ended January 31, 2009 include a $14.4 million goodwill
impairment charge. |
81
SCHEDULE II
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charged |
|
|
|
|
|
|
Impact of |
|
|
|
|
|
|
Balance at |
|
|
(Credited) to |
|
|
|
|
|
|
Foreign |
|
|
Balance at |
|
|
|
Beginning of |
|
|
Statements of |
|
|
|
|
|
|
Currency |
|
|
End of |
|
|
|
Period |
|
|
Operations |
|
|
Deletions |
|
|
Translation |
|
|
Period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended January 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
|
1,252 |
|
|
|
249 |
|
|
|
(160 |
) |
|
|
(53 |
) |
|
|
1,288 |
|
Allowance for sales adjustments |
|
|
2,551 |
|
|
|
441 |
|
|
|
(484 |
) |
|
|
(139 |
) |
|
|
2,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowances |
|
$ |
3,803 |
|
|
$ |
690 |
|
|
$ |
(644 |
) |
|
$ |
(192 |
) |
|
$ |
3,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended January 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
|
1,288 |
|
|
|
989 |
|
|
|
(924 |
) |
|
|
(48 |
) |
|
|
1,305 |
|
Allowance for sales adjustments |
|
|
2,369 |
|
|
|
676 |
|
|
|
(642 |
) |
|
|
(135 |
) |
|
|
2,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowances |
|
$ |
3,657 |
|
|
$ |
1,665 |
|
|
$ |
(1,566 |
) |
|
$ |
(183 |
) |
|
$ |
3,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended January 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
|
1,305 |
|
|
|
1,413 |
|
|
|
(1,123 |
) |
|
|
62 |
|
|
|
1,657 |
|
Allowance for sales adjustments |
|
|
2,268 |
|
|
|
612 |
|
|
|
(1,164 |
) |
|
|
69 |
|
|
|
1,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowances |
|
$ |
3,573 |
|
|
$ |
2,025 |
|
|
$ |
(2,287 |
) |
|
$ |
131 |
|
|
$ |
3,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying report of independent registered public accounting firm.
82
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, on April 15, 2010.
|
|
|
|
|
|
QAD Inc.
|
|
|
By: |
/s/ Daniel Lender
|
|
|
|
Daniel Lender |
|
|
|
Chief Financial Officer |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the Registrant and in the capacities and on the date
indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
|
Chairman of the Board, President
|
|
April 15, 2010 |
Pamela M. Lopker |
|
|
|
|
|
|
|
|
|
|
|
Director, Chief Executive Officer
|
|
April 15, 2010 |
Karl F. Lopker
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
Executive Vice President,
|
|
April 15, 2010 |
Daniel Lender
|
|
Chief Financial Officer |
|
|
|
|
(Principal Financial Officer) |
|
|
|
|
|
|
|
|
|
Sr. Vice President, Corporate Controller
|
|
April 15, 2010 |
Kara Bellamy
|
|
(Chief Accounting Officer) |
|
|
|
|
|
|
|
|
|
Director
|
|
April 15, 2010 |
Scott Adelson |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
April 15, 2010 |
Terry Cunningham |
|
|
|
|
|
|
|
|
|
/s/ Peter R. van Cuylenburg
|
|
Director
|
|
April 15, 2010 |
Peter R. van Cuylenburg |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
April 15, 2010 |
Tom OMalia |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
April 15, 2010 |
Lee Roberts |
|
|
|
|
83
INDEX OF EXHIBITS
|
|
|
|
|
EXHIBIT |
|
|
NUMBER |
|
EXHIBIT TITLE |
|
|
|
|
|
|
3.1 |
|
|
Certificate of Incorporation of the Registrant, filed with the
Delaware Secretary of State on May 15, 1997 (Incorporated by
reference to Exhibit 3.5 of the Registrants Registration
Statement on Form S-1 (Commission File No. 333- 28441)) |
|
|
|
|
|
|
3.1 |
(a) |
|
Certificate of Amendment of Certificate of Incorporation of
the Registrant, filed with the Delaware Secretary of State on
June 19, 1997 (Incorporated by reference to Exhibit 3.7 of the
Registrants Registration Statement on Form S-1 (Commission
File No. 333- 28441)) |
|
|
|
|
|
|
3.1 |
(b) |
|
Certificate of Amendment to Certificate of Incorporation of
the Registrant, filed with the Delaware Secretary of State on
July 29, 2005 (Incorporated by reference to Exhibit 3.1 of the
Registrants Quarterly Report on Form 10-Q for the quarter
ended July 31, 2006) |
|
|
|
|
|
|
3.2 |
|
|
Bylaws of the Registrant (Incorporated by reference to Exhibit
3.9 of the Registrants Registration Statement on Form S-1
(Commission File No. 333- 28441)) |
|
|
|
|
|
|
4.1 |
|
|
Specimen Stock Certificate (Incorporated by reference to
Exhibit 4.1 of the Registrants Registration Statement on Form
S-1 (Commission File No. 333- 28441)) |
|
|
|
|
|
|
10.1 |
|
|
QAD Inc. 1997 Stock Incentive Program (Incorporated by
reference to Exhibit 10.2 of the Registrants Registration
Statement on Form S-1 (Commission File No. 333- 28441)) |
|
|
|
|
|
|
10.1 |
(a) |
|
Forms of Agreement for QAD Inc. 1997 Stock Incentive Program
(Incorporated by reference to
Exhibit 10.1(a) of the
Registrants Annual Report on Form 10-K for the fiscal year
ended January 31, 2009) |
|
|
|
|
|
|
10.2 |
|
|
QAD Inc. 2006 Stock Incentive Program (Incorporated by
reference to Exhibit 4.4 of the Registrants Registration
Statement on Form S-8 (Commission File No. 333-137417)) |
|
|
|
|
|
|
10.2 |
(a) |
|
Forms of Agreement for QAD Inc. 2006 Stock Incentive Program
(Incorporated by reference to
Exhibit 10.2(a) of the
Registrants Annual Report on Form 10-K for the fiscal year
ended January 31, 2009) |
|
|
|
|
|
|
10.3 |
|
|
Form of Indemnification Agreement with Directors and Executive
Officers (Incorporated by reference to Exhibit 10.3 of the
Registrants Registration Statement on Form S-1 (Commission
File No. 333- 28441)) |
|
|
|
|
|
|
10.4 |
|
|
Executive Termination Policy (Incorporated by reference to
Exhibit 10.4 of the Registrants Annual Report on Form 10-K
for the fiscal year ended January 31, 2009) |
|
|
|
|
|
|
10.5 |
|
|
Change in Control Agreement for Karl Lopker (Incorporated by
reference to Exhibit 10.5 of the Registrants Annual Report on
Form 10-K for the fiscal year ended January 31, 2009) |
|
|
|
|
|
|
10.6 |
|
|
Change in Control Agreement for Pam Lopker (Incorporated by
reference to Exhibit 10.6 of the Registrants Annual Report on
Form 10-K for the fiscal year ended January 31, 2009) |
|
|
|
|
|
|
10.7 |
|
|
Offer letter between the Registrant and Daniel Lender dated
October 10, 2008 (Incorporated by reference to Exhibit 10.72
of the Registrants Quarterly Report on Form 10-Q for the
quarter ended October 31, 2008) |
|
|
|
|
|
|
10.7 |
(a) |
|
Change in Control Agreement for Daniel Lender (Incorporated by
reference to Exhibit 10.7(a) of the Registrants Annual Report
on Form 10-K for the fiscal year ended January 31, 2009) |
|
|
|
|
|
|
10.8 |
|
|
Promissory Note between the Registrant and Mid-State Bank &
Trust effective as of July 28, 2004 (Incorporated by reference
to Exhibit 10.2 of the Registrants Quarterly Report on Form
10-Q for the quarter ended July 31, 2004) |
84
|
|
|
|
|
EXHIBIT |
|
|
NUMBER |
|
EXHIBIT TITLE |
|
|
|
|
|
|
10.9 |
|
|
Credit Agreement between the Registrant and Bank of America,
N.A. effective as of April 10, 2008 (Incorporated by reference
to Exhibit 10.71 of the Registrants Annual Report on Form
10-K for the fiscal year ended January 31, 2008) |
|
|
|
|
|
|
10.9 |
(a) |
|
Amendment and Waiver to the Credit Agreement between the
Registrant and Bank of America, N.A. effective as of April 10,
2009 (Incorporated by reference to Exhibit 10.9(a) of the
Registrants Annual Report on Form 10-K for the fiscal year
ended January 31, 2009) |
|
|
|
|
|
|
10.10 |
|
|
Change in Control Agreement for Gordon Fleming* |
|
|
|
|
|
|
21.1 |
|
|
Subsidiaries of the Registrant* |
|
|
|
|
|
|
23.1 |
|
|
Consent of Independent Registered Public Accounting Firm* |
|
|
|
|
|
|
31.1 |
|
|
Certification by the Chief Executive Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
|
|
|
|
|
|
31.2 |
|
|
Certification by the Chief Financial Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
|
|
|
|
|
|
32.1 |
|
|
Certification by the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002* |
|
|
|
|
|
|
32.2 |
|
|
Certification by the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002* |
|
|
|
(*) |
|
Indicates the document is filed herewith. |
|
() |
|
Indicates a management contract or compensatory plan or arrangement required to be filed as an exhibit. |
85